T account
The term ‘T account’, derived from the distinctive T shape, is frequently used when discussing or analyzing accounting or business transactions. T accounts are used to represent general ledger accounts.
Typically one or more Ts are drawn on a white board or blank piece of paper. A general ledger account name or number is then written above each T. Debit entries are recorded on the left side of the “T” and credit entries are recorded on the right side of the “T”.
The goal of T accounts is for debit entries to equal credit entries, i.e. total assets to equal total liabilities and equity. For every adjustment made to the left side of a T, there must be one or more adjustments made to the right side of one or more Ts so that the net entries balance.
T accounts allow you to visualize how the debits and credits of a particular entry work and how they impact the financial statements. T accounts are a time tested tool in helping to analyze and decipher accounting entries. T accounts work because they are visually effective and simple to understand.
Example:
Receiving a bank loan of $100 would require two postings in a general ledger, and, if drawn on T accounts, two postings on T accounts. The $100 cash received would be listed as an asset on the left side of a T account labeled 'Cash', and the $100 owed to the bank would be listed as a liability on the right side of a T account labeled 'Bank Loans'. The entries balance.
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