T - account - also known as ledger account is an elementary training tool in double entry accounting. T - account is a convention for arranging and gathering the accounting entries of transactions like cash, account receivable and bonds payables.
The name of the account immediately indicates the appearance of the account because it looks like the letter T. Usually the name of the account shows on the horizontal line. Debit values are placed to the left and credits are shown to the right of the letter T. This type of accounts are usually clustered together because it allows to show all accounts that affect accounting transaction. T- accounts were used frequently but nowadays they are used less often usually to visualize operations on the account. Nowadays, accounting is more computerized, which eliminates the use of such accounts. However, they are often used by accountants in the preparation of transaction settlements (K. D. Cline 2015).
Rules and types of T - account
The first rule is that the growth in assets appears on the left side and the drop on the right side of the account. The second rule says that the increase in liabilities appears on the right side and the drop on the left. The last rule is that the growth in equity appears on the right side and the decrease on the opposite side of the account (C. Stickney, R. Weil 2013).
The ledger account can be divided into five basic categories:
- income - they are used to registering revenues from sales;
- expense - they are used to record revenue as opposed to capital expenses;
- asset - used to record the cost of assets like buildings, machinery and debts;
- liability - to control records of the liabilities of the company like loans taken form bank but also the amount of trade creditors;
- capital - used to record how much company owes its possessions (R. Denny 2003).
Debits and Credits for T - account
Debits and Credits are used in double-entry accounting system. Accountants use two shortcuts debit - Dr. or credit - Cr. instead of calling the left or right side of the account. The left side of an account is debit side and the right side of an account is the credit side. The word debit used as a verb means "record an entry on the left side of an account" on the other side word credit means "record an entry on the right side of an account". If we combines these terms with rules we will see the ensuing:
- that debit displays an growth in an asset, a loss in a liability or a loss in a shareholders equity;
- that credit displays a loss in an asset, an growth in a liability or a growth in a sharedolders equity.
To ensure equality of the balance sheet equation amounts debited to accounts for each activity must be balanced by the amounts credited to the accounts (C. Stickney, R. Weil 2013). Debit and credit apply only to the location. They refer to the left and right of the account do not represent an increase or decrease with some types of accounts, the debit side is increased but in the case of other types of accounts, the increase will be made on the credit side.
Examples of T account
- Cash T Account: A cash T account is used to record all the transactions related to a company's cash. This includes any money coming in from sales, cash payments for bills or expenses, and any money going out for payroll or other expenses. This type of T account is a useful way to track the company's total cash on hand and monitor any changes in the balance over time.
- Accounts Receivable T Account: An accounts receivable T account is used to record all the transactions related to a company's accounts receivable. This includes any money owed to the company by customers or clients, payments made toward those receivables, and any adjustments made to the balance. This type of T account can be used to track the total amount owed to the company and any changes in that balance over time.
- Bonds Payable T Account: A bonds payable T account is used to record all the transactions related to a company's bonds payable. This includes any money borrowed by the company through the issuance of bonds, any payments made toward those bonds, and any adjustments made to the balance. This type of T account can be used to track the total amount of money the company has borrowed and any changes in that balance over time.
Advantages of T account
A T-account is an effective tool for recording, tracking and summarizing transactions in double-entry accounting. It has the following advantages:
- T-accounts are easy to use, as they visually represent the double-entry system of accounting, which helps to ensure accuracy and consistency in the recording of transactions.
- They also help to quickly identify discrepancies in the accounting records and potential errors in the transactions.
- T-accounts help to clearly identify the source of the transaction and its effects on the financial statements of the company.
- They make it easy to track the flow of funds between the various accounts and to identify the sources and uses of cash.
- T-accounts provide a detailed and comprehensive view of a company's financial position, including its assets, liabilities, and equity. This can be useful in making financial decisions.
Limitations of T account
T accounts are used mainly in introductory accounting courses as they are a relatively simple tool for understanding basic accounting principles. However, they have several limitations including:
- They cannot accurately represent multiple transactions - T accounts are limited to one side of the ledger and thus cannot accurately represent multiple transactions that occur between two accounts.
- They do not account for credit-debit relationships - T accounts are not able to indicate that a credit to one account is a debit to another account. This makes it difficult to accurately track the flow of money between accounts.
- They do not provide a comprehensive view of the financial position of a business - T accounts do not provide a comprehensive view of the financial position of a business as it does not provide information on assets, liabilities, and equity.
- They are not designed for complex transactions - T accounts are not designed for complex transactions that involve multiple accounts, multiple entries, and multiple transactions.
- They cannot be used for tax purposes - T accounts cannot be used for tax purposes as they do not provide the necessary information required for filing taxes.
The following are alternative approaches to the T account that are used in double entry accounting.
- Debit and Credit Entry – Debit and credit entries are the two sides of a transaction that are used to record the related effects of a transaction.
- Journal Entry – A journal entry is an entry in the journal of a company which records the financial transactions that take place during a certain period.
- Trial Balance – A trial balance is a list of all the balances of ledger accounts that are used to identify errors and discrepancies in the double entry accounting system.
- Balance Sheet – A balance sheet is a financial statement that shows the assets, liabilities and equity of a company as of a certain date.
- Profit and Loss Statement – A profit and loss statement is a financial statement that shows the income and expenses of a company over a certain period of time.
In conclusion, T accounts are just one of the many approaches used in double entry accounting, which include debit and credit entry, journal entry, trial balance, balance sheet and profit and loss statement. All these approaches are used to record and analyze financial transactions.
- Bragg S. (2018). T - account, "Accounting Tools”.
- Cline K. D. (2015). Banking on Confidence: A Guidebook to Financial Literacy, "iUniverse", 19.
- Denny R. (2003). Accounts for Solicitors, "Cavendish Publishing Limited”, 7.
- Stickney C., Weil R. (2013). Financial Accounting: An Introduction to Concepts, Methods and Uses, "South - Western Cengage Learning”, 51 - 52.
Author: Hanna Cugier