The T Account
The T account derives its name from its shape.
The T account is the simplest form of a ledger
account and is a convenient way to analyze a
transaction before journalizing.
In its simplest form, an account has three main elements a:
•
title
•
debit side (left)
•
credit side (right)
An amount entered on the left-hand side is called a debit entry.
An amount entered on the right-hand side is called a credit entry.
The words debit and credit do not mean increase and decrease or good
and bad. They simply mean left and right respectively.
Increase/Decrease Rules for Assets, Liabilities and Capital
Balance Sheet Accounts
Assets
Balance
+
–
Liabilities
–
Capital
Balance
+
–
Balance
+
The increase side of any account is the side that is the normal balance
side--the same side that the account appears in the beginning
accounting equation. The decrease side of an account is the side
opposite to that on which the account appears in the accounting
equation.
Assets usually have debit balances:
•
To increase an asset--debit
•
To decrease an asset--credit
Liabilities usually have credit balances:
•
To increase a liability--credit
•
To decrease a liability--debit
Capital always has a credit balance:
•
To increase capital--credit
•
To decrease capital--debit
Revenue is an inflow of assets resulting from the sale of goods or services.
Revenue is an increase in capital resulting from business operations. The
most important of these is the Sales account.
Expenses are costs incurred by a business in earning revenue. Expenses
are a decrease in capital resulting from business operations. Examples
include Salaries Expense, Rent Expense, Utilities Expense, and so on.
Increase/Decrease Rules for Revenues and Expenses
Income Statement Accounts
Revenue
–
Balance
+
Expenses
Balance
+
–
Revenues have credit balances:
•
To increase a revenue--credit
•
To decrease a revenue--debit
Expenses have debit balances:
•
To increase an expense--debit
•
To decrease an expense--credit
Capital increases from:
•
the realization of net income by the business
•
additional investment by the owner of the business
Capital decreases as a result of
•
expense transactions
•
withdrawals of assets made by the owner
Analyzing Common Transactions
To analyze any transaction before journalizing, follow these steps:
Step 1:
What accounts are involved in the transaction?
Step 2:
Make the appropriate number of T-accounts.
Step 3:
What type of accounts are they? (assets, liabilities, owner’s
equity)
Step 4:
Decide whether there is an increase or decrease in each
account and apply the rules given above.
Step 5:
Journalize the T accounts.
Study the six entries given below and apply the five analysing steps
•
Bought a new desk for $500 cash
(Asset)
Office Furniture
(Asset)
Cash
500
•
500
Sold an old desk for $200 cash
Cash
200
Office Furniture
200
•
Received $1 000 cash from revenue
Cash
Revenue
1 000
•
1 000
Paid telephone bill, $150 cash
Telephone Expense
Cash
150
•
150
Owner, T. Summers, invested an additional $5 000 cash
Cash
T. Summers, Capital
5 000
•
Owner, T, Summers withdrew $400 cash for personal use
5 000
T. Summers, Drawings
Cash
400
400
For more information, refer to pages 24 - 29 and 33 - 39 of the text.
Quick Check:
Complete the following text book assignment on loose-leaf and hand it in.
Century 21 Page 64 4-M