Have you ever heard of T accounts?
In accounting we open an account for each item in our records. The account has the following format:
As you can see, the conventional account has the format of the letter T; hence they are often referred to as T accounts.
By account, we refer to the summary record of all transactions relating to a particular item in a business.
A ledger is a whole bunch of T-accounts grouped together.
The main ledger is called the general ledger. Virtually all T-accounts in a business fall under the general ledger.
We also have two subsidiary (supporting) ledgers:
We will discuss these subsidiary ledgers and their relation to the general ledger in more detail a bit later.
Let us take our previous transactions relating to the bank account (or cash) of George’s Catering and see how this would be applied in drawing up the bank T-account. The first transaction that involves the bank account occurs on the 1st of April, where Mr. Burnham invested $15,000 in the business.
What happens to the bank account here? It is debited, as it increases. So we will do the same to the T-account for the bank account.
We debit the bank account. (To debit an account means to make an entry on the left-hand side and to credit an account means to make an entry on the right-hand side.)
As you can see, we record the date of the transaction also. As a general rule, we use the opposite or contra account (in this case capital) to describe the source of this increase to the bank account. If we were to describe each transaction occurring within the T-account above as "bank", it would not adequately describe why our bank account increased or decreased. Using the opposite or contra account gives us a much better description of the transaction.
The next transaction relating to the bank account was on the 7th of April.
Let’s insert this in our bank account:
Once again, our journal entry relating to bank was a debit. So we debit our bank account. The credit was to loan, so this is used to describe what has happened to our bank account above.
The third transaction was as follows:
This time bank was credited, so we do the same to our T-account:
This is the same as the previous transaction, just on the opposite side.
Here are the remainder of the journals relating to bank:
Now let’s see what our bank account looks like after all the transactions above:
As previously mentioned, an account is the summary record of all transactions relating to a particular item in a business. A business owner can quickly look over T-accounts such as the one above in order to extract information. For example, if you examine the T-account above, you can see that all increases to the bank account (receipts) occur on the left side. All the decreases to the bank account (payments) occur on the right side.
The nature of each transaction could also be quickly determined. For example, if one looked at the transaction on the 17th of April, one could quickly ascertain that on this day $10,500 was received due to "services rendered" (income was received immediately in cash).
If one examined the "creditors" entry on the 13th of May one could quickly determine that $200 was paid to creditors. In this case one could add the word "telephone" in brackets next to "creditors" to make the description even more clear – the business paid the telephone company for the bill owing.
In our next lesson we're going to continue working with T-accounts and focus specifically on how to balance a T-account.
Click below to see questions and exercises on this same topic from other visitors to this page... (if there is no published solution to the question/exercise, then try and solve it yourself)
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