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.
- 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