What Are T-Accounts?
Keeping your financial statements and records neat and organized is a must if you want your small business to succeed. T-accounts are a quick and easy way to represent business transactions in your general ledger and journals.
T-accounts help you keep a clear image of your finances by showing in a very simple and visual fashion just how your credits and debits balance out (a key part of double-entry bookkeeping). Accountants and bookkeepers often utilize T-accounts to make the double-entry accounting system of bookkeeping easier to manage — and you can, too.
Let's take a deeper look at T-accounts, how to use them, and how Skynova's accounting software helps you streamline all of your business accounting.
What Are T-Accounts and Why Are They Used?
To start, T-accounts are called such because they resemble a capital T on the journal entry page. The name of the account is above the top line, and to either side of the middle line are the debits and credits recorded for that account. The left side is always for debits and the right side is always for credits. The left-hand side and right-hand side must also always balance each other out.
This balancing of credits and their corresponding debits is known as the matching principle and is a fundamental part of the double-entry bookkeeping used by accountants, bookkeepers, and business owners. Double-entry simply means that an entry to one account will have an opposite but matching entry in another account. If money moves out of a debit account, it must move into a corresponding credit account to bring those accounts back into balance. T-accounts are used because they are a simple and easy way to represent these corresponding transactions in and between your accounts.
T-accounts can be created for each account your business has, from assets to inventory to owner's equity. Having T-accounts for each category helps you create a balance sheet or summary of your finances without the stress or hassle of digging through your records and receipts.
How Debits and Credits Work in Accounting
While you may be used to thinking of credits and debits in simple terms of plus or minus (i.e., your bank account goes up if it is credited money and goes down if it's debited), the terms are not that straightforward when it comes to business accounting. In fact, the way they are put into action may feel counterintuitive at first.
Certain types of accounts increase when they are debited and decrease when they are credited. Money coming in and increasing the balance is said to be debited to those accounts, which include expenses, assets (like cash), and dividends. Money going out will be crediting those accounts.
However, credit accounts are those that go up when credited and down when debited. Money coming in is seen as crediting the account, and money going out is debiting it. These include the owner's or shareholders' equity accounts, revenue accounts, and liability accounts.
Because there is always an equal but opposite action to match every transaction, money coming from the debit side of a T-account will end up on the credit side. Business accounting is always about the flow of money or another value, and where that money ends up is what determines if it's considered debited or credited.
Example of a T-Account
A very simple general ledger entry to look at as a T-account example is the sale of goods. If John, who has a line of skin care products, sells $5,000 worth of products, he'll credit (or decrease) his inventory the full $5,000. He will then debit (or increase) his cash account $5,000. One goes down while the other goes up.
If he uses accounting software, this transaction will be recorded automatically as soon as he generates an invoice and that invoice is paid. If he's keeping a more traditional pen-and-paper general ledger, he'll probably have journal entries associated with his inventory and cash accounts. These journals are where he'll record the transaction, updating his general ledger afterward.
How Do I Create a T-Account?
You may have a journal for each individual account and a general ledger where all the information from your journals is gathered together and recorded. If you use accounting software like Skynova's, the method will be the same. There's also the added benefit of being able to do it anywhere you have the internet, including right on your phone.
Let's go through the steps of creating a T-account:
Create a New Journal Entry
A journal is simply a record for a given type of business account. You will create one for each of your different accounts, such as accounts receivable, accounts payable, or your cash account. Later, you'll gather the current data from each journal and add it to your general ledger. Think of your journal as a daily log and your ledger as a more polished presentation.
To create a new journal entry in a physical journal, open to a new page and then label and record your transactions. Relevant information needed includes the date, a description of what happened, and a unique reference number (if applicable), which you'll note on the entries of each account involved. You'll also need to keep the records of these transactions, such as sales receipts or customer invoices.
If you're using Skynova's business accounting software, a double-entry transaction will automatically be generated as soon as you create and send an invoice and that invoice is paid. All the information you'll need to create your T-account will be ready whenever you are.
Determine the Type of Journal Entries You'll Need
Expense accounts, equity accounts, cash, and a general ledger account are all types of accounts for which you'll create journal entries. Recording everything in a general ledger makes for neater records to consult, such as when you're doing your taxes, but it's also an insurance against inaccurate or incomplete recordings in any of your other journals. Checking your recorded transactions, especially when adding them to your general ledgers, is known as balancing your books.
When it comes to knowing which accounts will need journal entries, consider each transaction and the accounts it affects. If John, from the example above, has now purchased supplies to replenish the stock sold from his inventory, he will record the transactions in both his supplies and cash accounts journals because both are affected by his purchase.
Add the Correct Debits and Credits
Recording debits and credits is all about tracking the flow of money, so there is always a source account (where the money comes from) and a destination account (where the money ends up). Failing to record a debit's corresponding credit will disrupt your bookkeeping and, potentially, your bank balance later on. Tracking down mistakes can be a major headache; save yourself the hassle by remembering to always pair one with the other when recording transactions.
When John receives payment from one of his customers, he will note the transaction on the T-account of his accounts receivable journal and also the T-account of his cash or bank account journal. He will create a credit entry for the first to note a decline in his customer's account balance and create a debit entry for the second to show that money has moved into his cash or bank account. If he then makes a payment to one of his suppliers, he will debit his accounts payable T-account and, this time, credit his cash T-account.
Update Your General Ledger
Your general ledger is where you'll gather all of your general journal entry data. This will be the record you consult when you run your financial reports. It must be updated and finalized before you run those reports, but keeping it up to date before finalizing will save you a bit of hassle before that deadline begins to loom in front of you.
A useful practice is to update your general ledger any time you make journal entries for your accounts, or at least set time aside to do this on a regular basis. When it comes time to run your financial reports, you'll have already checked your records for accurate and complete recordings. Create a routine around your bookkeeping tasks to stay as organized as possible.
Let Skynova Help You Manage Your Small Business Bookkeeping
Now that you know what a T-account is and understand how to create one for your various accounts, it's easy to see just how important it is for small businesses to have the best products and practices when it comes to maintaining their finances.
As a small business owner, though, you already have so many hats to wear, and remembering which accounts go up when debited and down when credited can feel like just a little too much. Luckily, Skynova's accounting software and business templates can help you keep your small business's finances organized, up to date, and running smoothly. Our software automatically generates double-entry account records every time your business makes or receives a payment. Your debits and credits will always balance out.
Check out Skynova's software products and simplify your small business bookkeeping today.
Notice to the Reader
The content in this article is meant to be used as a general accounting guideline. It may not apply to your specific situation. As always, please consult with a professional accountant to ensure that your bookkeeping adheres to standard accounting practices.