I'm Larry Walther, and this is principlesofaccounting.com, Chapter 2.
In this module we will be discussing T-accounts.
T-accounts are simply tools, they're quick and simple tools to
see how a small number of transactions and events will impact a particular company.
It's not actually used for maintaining accounting records for a business.
It's an analysis tool or in a classroom setting,
it's very likely to be used as a teaching tool.
It's called a T-Account because of its shape,
it looks like a T as we'll see in a moment.
Debits are on the left and credits are on the right.
The balance is the amount by which debits exceed credits or vice versa.
Now here's an illustration of a T-account on the left for cash.
And on the right-hand side of the screen I've produced the actual
page from the general ledger for cash.
And you'll notice all of the debits to cash looking at the ledger, 25,000,
4,000, and 4,800.
Those debits correspond to the left hand side of the T-account.
The credits correspond to the right hand side of the T-account.
So the T-account is an iconic representation of the general ledger and
you'll notice in this particular case, the total debits are 33,800 and
total credits are 7,500.
Debits exceed credits by $26,300.00,
which is the balance that you find in the general ledger account for cash.
Moving on, let's also talk about chart of accounts
because you might hear a reference a company's chart of accounts.
A chart of accounts is just a listing of the accounts in use
by a particular company.
Often times the chart of accounts,
each account name corresponds to a particular account number.
Often times, that numbering has a very logical sequence to it.
For example, here I've got three asset accounts and
I've elected to begin each of those with a 1, or make them the 100 type accounts.
Similarly, liabilities might be the 200 type accounts and so forth.
That allows someone to quickly look at the charted accounts and the corresponding
balances for each account, to know whether they are asset accounts or
expense accounts or whatever they might be.
It further allows ease of division.
If a company has five bank accounts, say cash is account 101,
you might have account 101.1 for A bank, 101.2 for
B bank, 101.3 for C bank, and so on.
So it gives you tremendous flexibility to add accounts, subdivide accounts,
maintain accountability over those accounts.
Finally, I would say it also facilitates computer sorting.
It's far easier to sort by numerical base,
rather than a narrative verbal type base in a computer context.
While we're on the subject of subdividing information.
There's certain accounts that may have subsidiary accounts to back them up.
Think about the accounts receivable account that you've been exposed to
thus far.
That is a controlled account.
It represents the total receivables of an entity.
However, obviously, you need to know
what customers make up each of the amounts in the total accounts receivable.
And that's where a subsidiary account would come in.
A subsidiary account Is back up our auxiliary records to support the balances
found in the general ledger or the general ledger account,
also called the control account.
It's important that you reconcile your subsidiary and control accounts.
Here I have an example.
In this particular case,
I've got the accounts receivable general ledger account on the left.
It's the green looking account.
And you can see I had a beginning balance of $30,000.
I had a sale on January 11th, I debited accounts receivable for $6,000.
I apparently had collections on January 12th and 24th for 11,000 and
8,000 respectively.
And then I had another sale for $2,000 on January 30th.
Well that gave me,
if we look at the general ledger account, I know that I'm owed $19,000 in total.
What I don't know is who owes me that amount.
So I've got the subsidiary account shown for Compton, Fisher, Sunderman, and
Moore, and you can see which transaction is related to which customer and
what the balances are.
Notice it's important in the reconciliation that the $19,000 total,
be identifiable by individual customer.
What other accounts, in addition to accounts receivable,
might involve might involve subsidiary accounts?
Well, you would also have the potential for
subsidiary accounts related to accounts payable.
You would have this potential for subsidiary accounts related to your land
buildings and equipment to show not only how much you have in total, but
what individual amounts comprise that amount in the ledger.
There's any number of opportunities where you may find it beneficial to
have subsidiary records to back up the amounts found in the general ledger.
But importantly the debit, credit format that you've seen,
the self balancing set of accounts, debit cash, credit accounts receivable,
those are balancing off of the general ledger accounts.
The subsidiaries are backed up in the database system.
You can well imagine it's simply a matter of data mining.
In a manual context, you might even use a carbon paper or one right type system to
keep up with your subsidiary accounts as you post a general ledger amount,
it's simultaneously updating the subsidiary accounts.