Purpose of this tutorial:

My sister is a law student, but has to take a financial accounting class this semester. Being a law student, she is smart, of course, and after she understood the first basic concepts, she didn’t need any more help from me. However, sometimes the hardest part of financial accounting is understanding it at the very beginning.

With this post, I’m going to try and explain t-accounts a little differently than your textbook might, because sometimes a different way of explaining things can make it clearer.

This is Part 1. It will discuss the basics of how to set up and use a t-account, so you can get the idea for how to use it.

Part 2 will discuss technical terms, which your textbook will probably throw around right from the first page, like debit and credit. Try to understand Part 1 before reading about how the terms are used.

Welcome to T-Accounts

Companies keep track of the different amounts of stuff that they own, earn, owe, etc, in separate accounts. This is similar to how you might keep track of your own cash in your checking account. However, businesses keep track of the cost of the buildings they own, the money people owe them, the work they owe other people, and many other things, each in their own separate account.

Anatomy of a T-account

1. Draw an upper case T
   
2. Write the name of the account (stuff you’re keeping track of) on the top of the T.
   
3. When you GET cash, write it on the left side of the T. When you PAY cash, record it on the right hand side. WARNING: Some accounts are the opposite-they increase on the right and decrease on the left. More on this later.
   
4. T-accounts show their usefulness when you have more than one in-flow and outflow. Let’s say in one week, you got a $10,000 paycheck (inflow), but then you buy a new tv ($2,000 outflow), spend $100 on groceries (outflow), pay your cable bill ($200 outflow), and get a birthday check of $50 from grandma (inflow.) We can record each of these in the t-account as they happen.
   
5. Now, at the end of the week, we total up all of our inflows and outflows. In algebra, we would write this as:
   10,000 + 50 – 2,000 – 100 – 200 = 7,750.
   
   In a t-account, you write the balance ($7,750) under the larger side. Of course, with cash, it will always be on the left, because you can’t have negative cash, but some accounts can go either way. Most accounts will have a side that is naturall almost always larger though. That is called their “normal balance.” So cash has a “normal balance” on the left side.

First of all, T-accounts are not as complicated as you might think. They confuse people, I think, because you can do the same calculations with a more familiar algebraic expression, or just a column of addition and subtraction. However, when you are recording transactions over a long period of time, like how in real life you would record transactions all during the month, then the t-account is a convenient way to store information.

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