Ah… much better! Today's video is all about T-Accounts. I'm gonna explain what they mean,
how they're used, and what this… is all about?
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Hey, it’s James here. Back with another
episode of Accounting Stuff. Today's video is the third in a series that I'm creating
on Accounting Basics. If you're new to the channel then welcome! Don't forget to hit
that BIG SUBSCRIBE button below and click that little bell so you don't miss a thing.
In this video, things are about to get real. We're gonna dive deep into T Accounts which
are super useful way to help you visualise what accounts are, and to keep a track of
all of those Debits and Credits we talked about last week. Don't forget to watch this
one through to the end because I'm gonna run you through a whole bunch of useful examples!
Now who's ready for some T Accounting goodness? Let's do this! To kick things off I would
like to lay out the definitions of some important terms that will crop up throughout this video.
First, what is an Account? An Account is a place where we can record, sort, and store
all transactions that affect a related group of items. A T Account is a visual representation
of an account. It is called a T Account simply because it looks like a “T”, and it looks
like a “T” so that we can easily distinguish between all of the Debits and Credits that
impact it. If you're unsure what Debits and Credits are you might need to pause at this
point and watch the video that I posted last week. You'll find a link to it in the description
below. Finally, what is the General Ledger? It's a place where a business stores a complete
record of all of its financial transactions and accounts. Now that I've clarified these
terms let's get back to T Accounts. In its most simple form, a T Account looks like this.
Debits go on the left. Credits go on the right. If you are having a hard time remembering
the sides you can add a little “Dr” and “Cr” to the top of the T Account. “Dr”
and “Cr” are how we Accountants write Debits and Credits in shorthand. Last week
I taught you a simple way to remember which accounts are Debits and Credits… DEALER
D E A L E R DEALER. Dividends, Expenses and Assets go on the left. These increase when
Debited and decrease when Credited. Whereas Liabilities, Owner's Equity paid in and Revenue
go on the right. These increase when Credited and decrease when Debited. Now we will run
through a quick example to illustrate this… Let's say your business has a Cash account
with $100 in it. That's your Opening Balance. You take out $40 to pay a bill, and then you
decide to take out $25 more to buy some New Supplies. So you are left with $35 in the
account, which we will call your Closing Balance. “Balance” by the way is another way of
saying Total at a Point in Time. So here, your Opening Balance means your Total Cash
at the beginning, and your Closing Balance means your Total Cash at the end. Typically,
when you are doing a calculation you might choose to lay it out like we have done here,
however when you're using T Accounts you would show it like this. Cash is an Asset that's
the “A” in DEALER, so Debits increase it and Credits decrease it. Like I said before,
Debits are on the left and Credits are on the right. The final balance is still $35.
It is a different way to present the exact same information. The benefit being that it
is easy to distinguish between all of the different Debits and Credits. In this case,
your Closing Balance goes on the left hand side because it happens to be bigger than
zero, however if your Supplies had instead cost $65, then you would be left with Negative
Cash or an Overdraft of $5. So your Closing Balance would go on the right hand side instead.
Now you might be thinking… Why is all this necessary? I can already tell that little
calc that I did there. Well, this is a simple example for demonstration purposes, in reality
T Accounts are way bigger than this! Splitting out Debits and Credits allows us to spot things
quickly in the General Ledger. If you're new to Accounting it can be helpful to jot down
T Accounts as you're working through a problem to help you visualise this all in your head.
Eventually you might not need to do this anymore because your brain can just naturally process
this, but it takes a bit of practice to get there.
OK… so now I have another term for you and we touched on this one last week… Double-Entry
Bookkeeping. This means that every Accounting entry has an opposite corresponding entry
in a different account. In the context of T Accounts, this means that to record a transaction
you will need to write down both sides of it in at least two T Accounts. You might want
to pause the video now and grab a tea or a coffee or something to get “In the Zone”
for this next bit, because I'm about to take you through some examples of Double-Entry
Bookkeeping with T Accounts.
[Makes tea]
Mmm
OK, let's get to it! Now you might be wondering
why I was cleaning those windows at the start of this video. Well, I've recently started
my own Window Cleaning Business. I'm going to take you through some of those transactions
that took place in the first month of operation. First of all, I, the Business Owner invested
$100 of my own money into this window cleaning business, and in return the business issued
me $100 in stock. Then, the business decided to take out a further $200 loan from the bank
to fund its activities. Soon after receiving the bank loan, the business spent $30 in cash
on window cleaning equipment. Next, it spent a further $50 on cleaning supplies. The supplier
offers 30-day terms so the payment was made “On Account”. Finally, the business gets
its first client and makes a hundred and fifty dollars cleaning their windows, but in doing
so, it uses half of its cleaning supplies. The first transaction affects two accounts…
Cash and Stock. So we will need T Accounts for both of these categories. Cash is an Asset.
Like I mentioned earlier, it's the A in DEALER so Debits increase it. I therefore need to
put $100 on the left hand side of the cash T Account since Debits ALWAYS go on the left.
Stock is a form of Equity which represents the second E in DEALER so Credits increase
it. Credits always go on the right, so we will need to put $100 on the right hand side
of our new Stock T Account. Moving on… in the second transaction the business takes
out a $200 loan from the bank to fund its activities. This transaction affects Cash
and Loans Payable, which both need to increase by $200. We already have a Cash T Account,
so now we'll be needing another one for Loans Payable. The Cash part here is straightforward,
since we've done this already. We need to Debit Cash a further $200. Loans Payable is
a form of Liability the L in DEALER. So Credits increase it. The $200 increase in our Loans
Payable is recorded in our T Account by adding it to the right hand side. In transaction
number three, the business spends thirty dollars of its cash on window cleaning equipment.
So we need to credit cash by thirty dollars to decrease it and Debit our new Equipment
T Account by thirty dollars. We record the Credit to Cash by adding thirty dollars to
the right hand side of the Cash T Account since Credits always go on the right. Equipment
is another form of Asset. So the Debit to the Equipment goes on the left hand side.
Next, our business spends further $50 on cleaning supplies which it pays for “On Account”.
Paying for something “On Account” means that you agree to pay the supplier at a later
date. So for now you need to hold on to that cash, but you need to recognise a Liability,
since you owe the supplier for the goods they sold you. Supplies are a form of Asset, so
we need to create a new T Account for Supplies and Debit the left hand side of it by $50.
We owe $50 to the supplier, so we need another T Account for Accounts Payable. Accounts Payable
as a Liability, the L in DEALER, so we need to Credit the right hand side of the T Account
by $50. Is your head hurting yet? We only have one transaction to go, so it'll all be
over soon! In our last transaction, the business gets its first client and makes a hundred
and fifty dollars cleaning their windows using half of its supplies in the process. This
one is a bit more tricky because there are two sides to it, but don't worry we'll work
through it together! First, we need to recognise our Revenue. We made a hundred and fifty dollars
cleaning the clients windows, so Revenue needs to go up by a hundred and fifty dollars and
so does our Cash. Revenue is the R in DEALER, so Credits increase it. We need to make a
new Revenue T Account and Credit it by a hundred and fifty dollars on the right hand side.
The cash we have made is recorded as a hundred and fifty dollar Debit to the left hand side
of the Cash T Account. Now, there's one more thing we need to take note of, and then our
work is done. We said half of our cleaning supplies were used up on this job. So we can't
recognise them as an Asset anymore. They now make up our Cost of Sales, which is a type
of Expense. Expense is the first E in DEALER so Debits increase it. In our fourth transaction,
we spent $50 on supplies so if we have used half, then we need to Credit Supplies by $25
to decrease them, and Debit our brand-new Cost of Sales T Account by $25 to increase
it. There we have it, our first month of transactions all laid out visually in front of us in T
Accounts with Debits on the left and Credits on the right. So there you have it, an Accounts
is place where we can record, sort and store all financial transactions. A T Account is
a graphical representation of an Account. The General Ledger is a place where a business
stores a complete record of all of its financial transactions and accounts. Debits on the Left,
Credits on the Right. And finally, Double-Entry Bookkeeping means that every financial transaction
affects at least two accounts. Question of the day… do you find T Accounts useful?
If you're an Accountant or Bookkeeper, do you use these day-to-day? I would love to
hear your thoughts in the comments below. If you enjoyed today's video, please press
LIKE, it really makes a difference. And don't forget to SUBSCRIBE, I would love you to come
and join us. See you in the next video, Good Luck with those T Accounts, and have a Great Week!
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