What is a T Account and why is it Used in Accounting?
A T account is a way to organize and visually show double-entry accounting transactions in the general ledger account. In practice, T accounts are not typically used for day-to-day transaction as most accountants will create journal entries in their accounting software. While T accounts used more for a teaching and account visualization aid, the T account is especially useful in more difficult accounting transactions when you need to see how a business transaction impacts all parts of the financial statements. The T-account is also helpful in tracking track debits and credits to find accounting errors in journal entries.
The T-account can also be used in determining the proper account balance or to determine the amount to be entered in order to arrive at a desired balance. I always use two (or more) T-accounts when determining how to adjust an account balance. Drawing two T-accounts reminds us that every transaction or adjustment will have to involve at least two accounts because of double-entry accounting.
The T-account format is simply a large letter “T”. The top of the T is used as a heading to identify the account, which is the category for the transaction being recorded like supplies, rent, etc. Below the heading, the left side is used for debit entries and the right side is for credit entries. Since most accounts will have multiple journal entries and transactions, several numbers will show in the debit and credit columns. The balance of each T-account is calculated at the bottom.
Each journal entry is transferred from the general journal to the appropriate T-account.
Click for some Blank T Account Sheets to practice with.
How Does the Accounting Equation Work with T Accounts?
Remember that the accounting equation is the basis for bookkeeping and accounting as it helps figure debits and credits. The basic accounting equation says Assets = Liabilities + Owner’s equity
Why is a T-account Important?
T-accounts are important because they let an accountant:
- Analyze the financial transactions by categorizes of accounts rather than by date
- Visualize what is happening, which is useful when doing adjusting entries
- Find the account balance
- Differentiate between debits and credits
What is a contra account in accounting?
When working with T-accounts and general ledger accounts, the term contra account that will evidently come up. A contra account is an asset account there is a credit balance where the normal balance would be a debit.
One common contra account is Accumulated Depreciation which is typically associated with property, plant and equipment and it is credited when Depreciation Expense is recorded. Recording the credits in the Accumulated Depreciation means that the cost of the property, plant and equipment will continue to be reported and shows how much has been depreciated.