I’m going to go through a really easy example to show double-entry accounting using T accounts in action. Let’s say you just sold a one-year premium bookkeeping for startups subscription for $20,000 and your client paid in cash. Some accounts have a debit-side balance, while others have a credit-side balance.

• Every transaction a company makes, whether it’s selling coffee, taking out a loan or purchasing an asset, has a debit and credit.
• I now have three month’s worth of rent paid for, so my prepayments (prepaid rent) account is debited £6000.
• My income account (revenue account) is being credited £2.50, increasing its value, making the transaction balanced.
• If you remember from part 1 and part 2, we went through how every debit must have a matching credit and vice versa.

A business owner can also use T-accounts to extract information, such as the nature of a transaction that occurred on a particular day or the balance and movements of each account. On the left side of the T table, under the account name, that’s what we call the debit side (abbreviated dr). At its basis debit simply means left side; credit simply means right side. Doing two sets of double-entry accounting is a great way to make sure your books are complete and accurate, but it is also time consuming. T accounts are a simple and convenient way to organize your journals for basic bookkeeping functions. Above the T is the name of the account, and the T account is then separated into left (debit) and right (credit) sides.

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By displaying multiple transactions over a time period rather than a single transaction, it allows people to see a picture of a company’s activities. By breaking transactions down into a simple, digestible form, you can visualise which accounts are being debited and which are being credited. Any transaction a business makes will need to be recorded in the company’s general ledger. The general ledger is divided up into individual accounts which categorise similar transaction types together. T-accounts are used as an aid for managing debits and credits when using double-entry accounting.

A T-account works by showing how a transaction creates an increase and decrease in two separate accounts. This informs that you have a balanced account in your general ledger or that an error has occurred in the accounting process. Many small business lenders or grant programs ask for thorough documentation of your business’s financial standing during the approval process. Using T-accounts as visual aids in your accounting processes can help you present a more accurate and balanced general ledger to advocate for your financial health. As I stated before, some accounts will have multiple transactions, so it’s important to have a place number each transaction amount in the debit and credit columns.

T-accounts for Journal Entry 1

Alternatively, many accounting software packages allow users to enter accounts they wish to track and automatically generate a T-Account. The best way to understand how the rules of double-entry bookkeeping work is to consider an example. We will now record the six transactions carried out by Edgar Edwards Enterprises in the appropriate T-accounts. It is typically prepared at the end of an accounting period before financial statements are generated.

Due to its simplistic nature, T-accounts are also used as a learning tool to practice transactions and double-entry accounting. They can be found drawn on a scrap piece of paper to templates made in accounting software. Debits and Credits are simply accounting terminologies that can be traced back hundreds of years, which are still used in today’s double-entry accounting system. When most people hear the term debits and credits, they think of debit cards and credit cards. In accounting, however, debits and credits refer to completely different things. You notice there are already figures in Accounts
Payable, and the new record is placed directly underneath the
January 5 record.

Journal Entry 1

To pay the rent, I’ve used cash, so my bank account (an asset account) is credited by £2000. I’ve agreed to pay for the coffee machine next month so my accounts payable is increased (credited) by £700. Accounts payable is a liability account, keeping track of bills I still have to pay in future. T-accounts can display transactions from a specific time period such as a week or a month.

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