🧑🏫 Master your T accounts
T accounts are one of the first things you learn about when starting off in accounting…
and for good reason - they are really useful in helping you understand how journal entries work
Here, now, were going to cover a refresher on how they work, along with an example.
What are T Accounts?
T Accounts are use to showcase account balances after you book your Debits & Credits
It looks something like this:
Where the left side represents your Debits
The right side represents your Credits
And the bottom represents the net Debit or Credit balance that will show up on your Trial Balance
Why are T Accounts so important?
T Accounts are helpful whenever you are just starting out and trying to understand how Debits & Credits work.
This allows you to understand how every transaction in a business affects 2 areas…without exception.
But they can also be helpful when designing new processes and workflows.
For example…many times I’ll be creating a financial model, and I’ll need to understand how accounts are updated upon certain events.
T Accounts are a great way to spot check your information.
An Example with Accounts Receivable
Let’s go through a real simple example, using Accounts Receivable.
As a refresher - Accounts Receivable represent the amount that customers owe you from sales.
When an invoice is sent…
Debit Accounts Receivable
Credit Revenue (or deferred revenue)
When cash is collected…
This leaves us with a new $10k balance as a debt in our cash 🤑
and a net 0 balance on our accounts receivable, once the funds are collected.
T accounts are a pretty simple concept…
but they add a lot of value.