Understanding T Account - Explanation, Use And Significance

Business owners are required to know about a number of things and one of the most important terms that is required for people to know is T account. A T Account is a structure that is often used during double-entry bookkeeping in which debits and credits are recorded separately. This means that in a T account, debits are listed on the left side whereas, credits are recorded on the right side of the vertical line. 

This particular process allows people to read the general ledger of a company with ease. This is the basic definition that you need to know when you want to know what is a t account. Here in the article, we are going to explore all the major things that you need to know about T accounts. 

What is the importance of T Accounts?
T Account accounting is often used by accountants as the double-entry bookkeeping system is easier for people to manage. The double-entry bookkeeping system is a detailed bookkeeping process where every entry is recorded twice to make sure that there are no discrepancies. Since there are two entries, the two totals should balance each other and if this does not happen then, there is an error in the accounts. 

The double-entry system is often considered a little difficult and is majorly used by  CPAs (Certified Public Accountants). The information should be entered in a way that is easy-to-understand. This is the main reason why the ‘T’ structure is used to highlight the difference between ‘debits’ and ‘credits’.

Using a T account structure in the general ledger is always considered the best practice by accounting departments of any business. 

Understanding T Accounts with an example 
Even though the definition of t account might have made the topic and term clear to you, this example will make the understanding more clear to you. 

Let’s consider that there is a company known as X Crop that has recently sold a crop product at a value of $20,000. This means that the company will record the debit as $20,000 in cash, whereas the credits will include the same value marked as inventory. 

The ledger will have a big T with the name of the company on the top of the horizontal line. The left side of the T will have the debits (Cash - $20,000) and the right side will record the credits (Inventory - $20,000). 

To comprehensively interpret this diagram, it is essential to recognize that:

Debits serve to augment asset or expense accounts, whereas credits diminish them. 
Conversely, debits reduce liability, revenue, or equity accounts, while credits enhance them.
It is important that the debits and credits of a company should always balance each other. 

Even though T Accounts is the best accounting method considered by accounting departments, there are certain issues that arise while creating the same. If the information is not properly recorded, it can result in issues with the general ledger. Another very common accounting error is incorrect categories of transactions. It is common for departments to put one entry in a different category from the one it is supposed to be in.