T- Accounts
What is a T-Account?
Representation of a general ledger that documents the transactions of a business in a shape of a "T".
What is the first step to do when recording T-Account transactions?
Identify the impacted accounts (min. 2 accounts)
How does Owner's Equity change in T-Accounts?
Owner's Equity increase with Credits and Decrease with Debits
What are the equations for net income and net loss?
Net Income: Revenue - Expenses= Profit or Net Income
i.e: $500-$400=$100
Net Loss: Revenue-Expenses= Loss or Net Loss
i.e: $500-$550= $(50)
What is the basic structure of a T-Account?
Each account has a left side (debit) and a right side (credit).
What do you have to determine about the accounts when recording transactions?
Determine if the accounts are increasing or decreasing
How do Liabilities change in T-Accounts?
Liabilities increase with Credits and Decrease with Debits
What is the 1st step in calculating new balances in T-Accounts
Add up the debit sides of the account
What is the formula used within T-Accounts?
Assets= Liabilities + Owner's Equity
What is Double Entry Accounting?
Double Entry Accounting is a system within accounting based on the principle that for each transaction there has to be an equal dollar amount of debits and credits.
How do assets change in T-Accounts?
Assets increase with debits and decrease with credits.
What should you do with the lower sum once you've added the account's two sides?
Record the result on the side with the larger amount after subtracting the smaller amount from the larger amount.
Where are asset balances recorded in T-Accounts?
On the left (debit) side of the account.
Why is equal debits and credits required for each transaction entered into T-Accounts?
To ensure that the balances are equal while following the double entry transactions formula (Assets= Liabilities + Owner's Equity)
Sum up the Debit and Credit Theory
To sum, assets increase with debits, while liabilities and owner’s equity increase with credits.
What is the purpose of preparing a Trial Balance?
To display the balances of the ledger accounts and make sure that all of the debits and credits are equal.
How are liabilities and owner's equity recorded?
On the credit side (right side) of an account.
What does it mean to "credit" an account in the context of T-Accounts, and how does this impact Owner's Equity?
Increasing an account's balance on the right side, or crediting it, raises owner's equity.
Why is it critical to guarantee that the total of debits equals the number of credits in a trial balance?
It reveals a mathematical accuracy in the ledger accounts and that accounts were properly used for the transactions.