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 hey is James him 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 usable way to help
you visualize where the counter 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 accounts as 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 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 D R and C R to the top of the T account d R and C 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 DEA our
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 were left with $35 in the account which we will call your
closing balance balance by the way is another way of saying total as 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 cow that I did there well this is a simple example for demonstration purposes in reality T accounts are way bigger than this splitting our 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 visualize 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 together okay 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 bear because I'm about to take you through some examples of double entry bookkeeping
with T accounts okay 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 is spent a further $50 on cleaning supplies the supplier offers 30-day terms so the payment was made on account finally the business gets his 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 Deb is always go on the Left stock is a form of equity which represents the second Ian 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 he account moving on in the second transaction of 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 are 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 recognize 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 have $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 recognize 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 are 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 recognize 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 in accounts a place where we can record sort and store all financial transactions attea cloud is a graphical representation of an account the
general ledger is a place where business tours 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 here calcium score 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 [Music]
