Accounting is the basis of all business transactions. It allows us to count, track and manage our assets. Thanks to accounting, we manage our capital, properties, inventory and other important things. Furthermore, accounting is the language that business uses to communicate it’s past, present and expected future status. And, what is at the basis of accounting? You guessed it, T Accounts.
To explain T Accounts, most people will use a ledger with multiple accounts like “cash” and “notes payable” which are being used for payments for their small business’s free checking accounts. The ledger is draw in an actual T shape, giving them the name T accounts. Ultimately, the ledger creates a visual representation of what is happening when debit and credit transactions occur between accounts.
Debits And Credits
Which means, you will have a hard time understanding T accounts until you have a firm understanding of how debits and credits work. A debit is in an addition to an account while a credit is a subtraction from an account. Both may have positive and negative numbers. Additionally, the accounts can also for assets or expenses. Once you have a basic understanding of debits and credits, you will be ready to grasp the explanation of tea accounts.
Left & Right
When using T accounts to track expenses and income, you need to keep debits on the left side and credits on the right side. This is one of the fundamental rules of accounting for business. In a T account, the left side is always used as the debit side. Then, the right side is always used to track credits, like those from your POS terminals. You should not switch sides. Otherwise, you are much more likely to make careless mistakes. Stick to the left/right rule, and you are sure to use t accounts properly.
Do Pros Use T Accounts?
In the real world, certified personal accounts or certified financial accountants do not always use T accounts. They usually resort to excel or an accounting software, especially for corporate accounting. If the pros do not use use it, why should you?
T accounts offer a visual representation of how one account interacts with another. It will help you understand that when something is debited, it must be credited. This concept is essential for balance sheets and beyond. Once you have become proficient in cost accounting, you will be ready to learn more harder concepts included in higher levels of accounting like cost accounting, managerial accounting and forensic accounting.
So, you know that T accounts are named as such because they use the shape of a T for visual assessment of a person’s finances. However, there are some other related terms that you must be familiar with in order to make use of a T account effectively for your virtual bank account. So, here are some must-know finance definitions for accounting.
- Ledgers – Ledgers are just a whole bunch of T accounts.
- General ledger – This is simply the name given to the main ledger for a business.
- Account – This is the name given to all of the transactions completed for a particular business expense.
As long as you know these three terms, you will be able to properly understand and make use of T accounts in finance for business.
Although these lessons are not required for everyone outside of undergraduate business degree programs who may be receiving their finance degree, it is very important for anyone managing assets or finances. Moreover, if you are going into business, make your accounting courses a number one priority. It will serve you throughout your career as a business entrepreneur, owner or employee. Then, you can properly use your own small business accounting software with a full working knowledge of the rules.