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 |
32 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
Good work,Im not expert on that but i must say very good work.
Great explanations, wish you had been my accounting teacher in varsity now I employ an accountant! I now finally get T accounts!
Very good read – love the blog!
I’m reading through the comments and love the coaching thats going on haha… I agree with queenstown you would be a great teacher. Good post. T accounts are great tools. Dont so much depend on them but use them to gain understanding of the ins and outs of the particular account.
Sir
how many books used mainly for normal accounting pupose.
Mathew: Could you be more specific. What do you mean by “books”?
Is there a way of remembering why assets should be a debit? I think of assets as a credit, just like when you have cash or deposits in the bank account, they are credits, but in accounting it seems to be the opposite. An asset is a debit and ‘Cash at bank’ is also a debit (asset). Therefore a liability is a Credit.
Thanks
Kerryn: The reason why assets are recorded as a “debit” is because they appear on the “left” side of the ledger page. This is in accordance with the “system” upon which the structure of accounting is based on. It is called, “The Accounting Model”. You can download a copy of this from my Real Life Accounting website at http://www.reallifeaccounting.com/accounting_model.asp. It may appear to you that when a bank refers to cash as a credit it is being inconsistent with the Accounting Model. However, when viewed from the bank’s point of view, instead of yours, you will find that they actually are being consistent. The cash you put in the bank is recorded as a debit on their books, and a credit to a liability account. This is because it is your money, not theirs. Review the Accounting Model to verify this. So when you decrease your bank account by removing money, they refer to that as a debit to your liability account and a credit to their cash account since it is also being decreased. Make sense?
I know this isn’t a job board, but I have a great opportunity for a General Ledger Accountant with some Automotive experience and either BPCS or AS400 experience. It is a direct hire position in Farmington Hills, MI. If anyone in your network would like to be considered for this opportunity please call me at 248-899-1011. Thank you!
John, Wish you were still posting. I need some extra help. I am an accounting student and am pretty lost at this point. I get T Accounts but the trial balance is my problem. I cannot seem to get them to balance. Thanks
Mary: It could be a number of different things. A technique to try first is to add the debits and credits and see what the difference is. Check that number with all your entries. No luck, divide in half, check that number against your entries. Still no luck, double the amount and look for that number. You may have a debit or credit in the wrong column. If nothing jumps out at you then it is plain old detective work. Be patient, leaving no stone unturned. In other words, systematically eliminate each account. Review in your mind how the debits and credits for each account works to make sure that each one makes sense to you. It is best to sleep on it overnight, come to it fresh and not frustrated. Let your mind do the work. As you examine each account listen to any urges or suspicions. Don’t discount anything no matter how subtle. Follow up on your intuition and you may be surprised to find the thread that leads to the solution.
Good luck.
I have been out of accounting school for so long that I couldn’t believe they were still teaching using T accounts. With the computer age and all of the technology available, it’s good to see that some tried and true methods still exist. For me, using T accounts was the easiest and fastest method to understand basic accounting principles. Good post and good content.
hi to all i am in accounting class an have some t accounts to do an my teacher is tell in me to use word how can i do this in word
Kyile: Creating the horizontal line is easy. Creating the vertical line is the challenge. Perhaps you could ask your teacher since the suggestion came from him/her.
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