T-Account defined
A T-Account is a template or format shaped like a “T” that represents a particular general ledger account. Debit entries are recorded on the left side of the “T” and credit entries are recorded on the right side of the “T”. It is a tool for organizing journal entries and analyzing accounting transactions.
Working with T-Accounts
There are a few business owners or managers who have a fantastic ability to remember details, but I would venture to say that most of us find our memory diminishing over time. T-Accounts come in handy when a series of journal entries are required and it becomes too difficult to keep all of them in your head.
When solving accounting problems, you have to think of accounting transactions in terms of the “accounting model”. Click this link if you need to refresh your memory regarding the accounting model:
http://www.reallifeaccounting.com/accounting_model.asp
The “accounting model” is a template you can use to remember how debits and credits work. The two most common scenarios for using T-Accounts are: 1) determining why certain transactions were previously posted to the general ledger; or, 2) working out the most appropriate place to post certain accounting
transactions.
T-Accounts work because they are visually effective. This means they are simple to understand and usually it is possible to portray all the T-Accounts on one page. Let’s look at a basic accounting transaction and then translate it into T-Account form. Assume you sold an accessory to one of your rental inventory assets for $35 cash and deposited the money into the bank. You originally bought the accessory for $20 and put it into inventory until it was sold. The journal entries for the transaction would look like this:
| DESCRIPTION | DEBIT | CREDIT |
|---|---|---|
| Cash | 35.00 | |
| Sales | 35.00 |
| DESCRIPTION | DEBIT | CREDIT |
|---|---|---|
| Cost of Goods Sold | 20.00 | |
| Inventory | 20.00 |
The T-Accounts would look like this:
You can easily see that the debits equal the credits. Let’s look at a more complex accounting transaction. You bought a company van to delivery your rental inventory for $25,000 and you did this by putting $5,000 down and setting up a liability (Notes Payable) for $20,000. You made your first payment of $380, of which $80 was interest, and your first month’s depreciation was $833. To the unfamiliar, these transactions might appear confusing until T-Accounts are used.
A critical step is to make sure that the debits equal the credits. If not, you have made a mistake that must be solved. Next, simply put these T-Accounts in journal entry form:
| DESCRIPTION | DEBIT | CREDIT |
|---|---|---|
| Fixed Assets – Van | 25,000 | |
| Cash | 5,000 | |
| Notes Payable | 20,000 |
| DESCRIPTION | DEBIT | CREDIT |
|---|---|---|
| Notes Payable | 300 | |
| Interest Expense | 80 | |
| Cash | 380 |
18 Comments
Thank you so much indeed for helping the success of people’s businesses.
Keep it up.
I am in a accounting class and for some reason I just can’t understand how to figure out Bad Debts. I need an explanation for a First grader I think. I have gone on-line and read my book a thousand times and just d not get it.
Example:
The following is a portion of the current assets section of the balance sheets of The Sweet Cafe at December 31, 200 and 2008:
(a.) If bad debts expense for 2009 totaled $16,400, what was the amount of accounts receivable written off during the year?
(b.) The December 31, 2009 Allowance account balance includes $8,400 for a past due account that is not likely to be collected. This account has not been written off. If it had been written off, what would have been the effect of the write off on:
(1.) The current ratio at December 31, 2009?
(2.) Net income and ROE for the year ended December 31, 2009?
(c.) What do you suppose was the level of The Sweet Cafe’s sales in 2009, compared to 200?8 Explain your answer.
Nicki: May I suggest that you read my article on Bad Debts first, then ask me a specific question related to what you don’t understand about the problem you are working on. I would rather help you that way, than end up doing your homework for you. Go to http://www.reallifeaccounting.com and click on Articles. Scroll down until you come to “Bad Debts”.
John
Ok, I read it. I am just not getting the math. Is there any type of formula I can use? I just don’t understand why I don’t get this!
Nicki
I just noticed part was missing:
Accounts receivable, less allowance for bad debts $7200 and $5100, respectively.
12/31/09 12/31/08
$243,600 $215,800
Nicki: Here’s my problem. You have given me several problems you are trying to solve. I’m not sure which question you are interested in, or where you are getting hung up. I think you should select one problem, lay it out for me so I don’t have to guess, and explain the logic you are going through and then point out specifically where you seem to get lost.
John
Let’s take a.)
Bad debts totaled $16400 for the year.
My allowance already was $12300?
Making my write off $4100?
This is my first problem, how to get the difference.
Nicki
Nicki: What do you mean the “difference”? The difference between what?
Let’s walk through the “thinking” process step by step. You have to think about what is actually going on in terms of increases or decreases. You read my article, so you know what accounts are involved and that there are several transactions to work out. What’s the first one? You tell me, where to bad debts come from? Then we will take it from there. Please have patience. You can’t race through this. In fact, that is probably what the problem is. You are missing some steps. So let’s start from the beginning.
Are you willing to do this?
John
How I understand first is:
What is in my allowance acct now for bad debts.
I am assuming it is the $7200 and $5100 but could be wrong.
Now it says the tota for the year was $16400.
It ask was was the total written off?
I took it as already had $12300 in acct but needed $16,400.
So wrote off an additional $4100.
I am sure I am incoorect though.
Nicki
Nicki: This is too confusing to do through this system. I need more information. Give me a call at 800-720-0126
John
Here is the exact question asked of me:
The following is a portion of the current assets section of the balance sheets of The Sweet Cafe at December 31, 2009 and 2008:
The accounts receivable for 2009 is 243,600
The accounts receivable for 2008 is 215,800
The allowance for bad debts for 2009 is 7,200
The allowance for bad debts for 2008 is 5,100
The bad debt expense for 2009 is 16,400
So with this information if you look at the bad debt allowance for 2008 with the 2009 bad debt expense less the accounts written off then this should equal the bad debt allowance for 2009.
(a.) If bad debts expense for 2009 totaled $16,400, what was the amount of accounts receivable written off during the year?
(b.) The December 31, 2009 Allowance account balance includes $8,400 for a past due account that is not likely to be collected. This account has not been written off. If it had been written off, what would have been the effect of the write off on:
(1.) The current ratio at December 31, 2009?
(2.) Net income and ROE for the year ended December 31, 2009?
(c.) What do you suppose was the level of The Sweet Cafe’s sales in 2009, compared to 200?8 Explain your answer.
I will try to call when I get a moment. Trying to work around a five year old can be tough.
Thanks again,
Nicki
Nicki: According to the instructions given in this problem, it looks to me like this:
Bad Debt Allowance 2008 5,100
Add Bad Debt expense 16,400
Sub Ending BD Allow
A/R write off 14,300
Question B makes seems to make no sense because the 2009 balance in Allowance is 7,200, so how can it consist of 8,400 in past due accounts? Does you textbook have an example of this?
Sorry, I may not be helping you much on this.
John
I proposed that question in my class forum. It is not in the text but from the teacher.
Finally an aha moment.
So: starting bal 5100+bad debt for the year 16400=21500-09 allowance 7200=$14,300
Gee whiz! Thanks
I will see what response I get from the question about b.
Thanks
Nicki
I think what was getting me is if it would have said: we had to right of an additional $16400 at the end of the year. To me the question was saying: you already have 5100 witten off in an account and at the end of the year we detrmined we needed to right off 16400, which makes it sound like this:
16400-5100=11300.
Nicki
Nicki: The dates are important. But I think the question is a little vague.
John
Well I got nowhere with the teacher-she said to read the pages on the bad debt again-gee helpful.
So I got:
11.a. $14,300
b.1. I am thinking lower ratio. (I finally determine b 1+2 were not actually calculations but an actual question)
b.2. Write offs o an accts rec’v has no effect on the income statement.
c. I have no idea!
This is probably all wrong. Any help appreciated.
Nicki
Oh when I asked: If the 2009 balance in Allowance is 7,200, so how can it consist of 8,400 in past due accounts?
Her response was, “it does not matter.”
Nicki
Nicki: Teacher’s are supposed to be there to teach. When a student asks a sincere question they deserve some clues to help them think if they are stuck. I attribute this attitude to laziness or uncaring. On the other hand, I watch out for students who simply want someone else to do their work. So it is a balance.
I’m guessing that she said “it doesn’t matter” because the question is not related to the information in the problem. She just wants to know what the effect would be on the current ratio and net income and ROE.
Remember that the Allowance account is a contra account to Accounts Receivable. Put the two together and you have “net” Accounts Receivable. When you make an entry into the Allowance account you have already “written-off” an amount to Bad Debts, because Bad Debts is an expense. All this means, (I’m assuming, when she uses the words “writing off”) is when there is no more reason to carry an amount in the Allowance account a journal entry is written to decrease the Allowance account and decrease the A/R account. This is because it has been established that these accounts are worthless and nothing will ever come of them so why carry them on the books.
There is no change in your current assets when you decrease Allowance and decrease Receivables. Therefore, no change in the current ratio, Net Income, or ROE (Return on Equity). There was no change in equity or net income so ROE doesn’t change. Does that make sense?
This is my best shot at this. Let me know if your teacher doesn’t agree. I may be missing something.
John
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