Explanation of T Account, Debit and Credit, and Double Entry Accounting System

In this accounting lecture, we will talk about T-accounts, accounting debits and credits, accounting balances and double entry accounting system.

All accountants know several terms that create basis for any accounting system. Such terms are T-account, debit and credit, and double entry accounting system. Of course, these terms are studied by accounting students all over the world. However, any business person, whether an investment banker or a small business owner, will benefit from knowing them as well. They are easy to grasp and will be helpful in most business situations. Let us take a closer look at these accounting terms.

T-Account

Accounting records about events and transactions are recorded in accounts. An account is an individual record of increases and decreases in a specific asset, liability, or owner's equity item. Look at accounts as a place for recording numbers related to a certain item or class of transactions. Examples of accounts may be Cash, Accounts Receivable, Fixed Assets, Accounts Payable, Accrued Payroll, Sales, Rent Expenses and so on.

An account consists of three parts:

- title of the account

- left side (known as debit)

- right side (known as credit)

Because the alignment of these parts of an account resembles the letter T, it is referred to as a T account. You could draw T accounts on a piece of paper and use it to maintain your accounting records. However, nowadays, instead of having to draw T accounts, accountants use accounting software (i.e., QuickBooks, Microsoft Accounting, Peachtree, JD Edwards, Oracle, and SAP, among others).

Debit, Credit and Account Balance

In account, the term debit means left side, and credit means right side. These are abbreviated as Dr for debit and Cr for credit. Debit and credit indicate on which side of a T account numbers will be recorded.

An account balance is the difference between the debit and credit amounts. For some types of accounts debit means an increase in the account balance, while for others debit means a decrease in the account balance. See below for a list of accounts and what a debit to such account means:

Asset - Increase

Contra Assets - Decrease

Liability - Decrease

Equity - Decrease

Contribution Capital - Decrease

Revenue - Decrease

Expenses - Increase

Distributions - Increase

Credits to the above account types will mean an opposite result.

Double Entry Accounting System

A double entry accounting system requires that any amount entered into the accounting records is shown at least on two different accounts. For example, when a customer pays cash for your product, an account would show the cash received in the Cash account (as a debit) and in the Sales account (as a credit). All debit amounts equal all credit amounts provided the double-entry accounting was properly followed.

Having a double entry accounting system has benefits over regular, one-sided systems. One of such benefits is that the double-entry system helps identify recording errors. As I mentioned, if one amount is entered only once in error, then debits and credits won't balance and the accountant will know that one or more entries were not posted fully. Note, however, that this check will help spot errors, but will not identify all cases of errors. For example, equal debits and credits will not identify an error when an amount was posted twice, but was posted to wrong accounts. Keep this in mind when analyzing causes of errors in accounting records.

Igor Voytsekhivskyy is a CPA and CIA working in public accounting. He maintains a website SimpleStudies.com devoted to helping people learn accounting online.

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Four Symptoms Your Small Business Accounting System Doesn't Work

Every year about this time, I see too many accounting systems that don't work... QuickBooks and PeachTree and Microsoft Small Business Accounting programs that don't do what their small business users want or need.

Sometimes, people know their accounting systems don't work. And they don't care. But, sadly, sometimes, the struggling small business person doesn't even know his or her system isn't working until it's too late. Until the business fails because the owners don't realize they aren't making money.

Fortunately, perhaps surprisingly, you can usually tell pretty quickly whether an accounting system like QuickBooks, Peachtree Accounting, or Microsoft Small Business Accounting works the way it should. Just look for one or more of the following four symptoms.

Symptom #1: You Don't Know How Much Cash You Have Right Now

Any accounting system, run right, tells you how much money you have in your bank accounts. To the penny. Accordingly, if you can't look at a bank register in your accounting system and see how much money you have, sorry, your system doesn't work.

Symptom #2: You Don't Know How Much Money You Made Last Week, Month or Year

Here's another symptom of things gone bad. With just a few clicks of your mouse, you should be able to produce an accounting report called a profit and loss statement that tells you whether you made money last week, last month, last year, and so on.

A profit and loss statement simply summarizes the revenues and expenses of a business for an interval of time and then shows the difference between these subtotals--which is your profit or loss.

Now, this instant access to profit and loss information wasn't always the case. In the past, people often waited until the end of the month or even the end of the quarter to send off their financial records to an accountant or bookkeeper. A few hours or a few days later, the bean counter produced a financial statement that showed whether or not the business had made money.

No more. If you're doing your accounting right using something like QuickBooks, you should almost always be able to see whether you're making money or not. And at almost any moment in time. That's the point.

Symptom #3: You See Goofy Numbers on Your Balance Sheet

The first two symptoms are pretty obvious, I guess, but the third symptom is sometimes more subtle...

Turns out you can sometimes produce a profit and loss statement that sort of looks right--even if it sometimes isn't. If you can produce a balance sheet that doesn't have goofy numbers, though, that's more telling. You can't fake a balance sheet. Accordingly, carefully check out your balance sheet report.

A balance sheet lists assets, liabilities and owner funds invested or reinvested. If you don't see goofy numbers on your balance sheet and your profit and loss statement looks right, you accounting system is probably capturing data in the right way.

Goofy balance sheet numbers include things like a big negative bank account balance, clearly incorrect accounts receivable or accounts payable balances, and any other accounts with strange names or balances.

Symptom #4: You Get Lots of Adjusting Journal Entries from Your CPA

Many accountants prepare a handful of end-of-the-year accounting entries for their small business clients. I often do this, for example, when I prepare a small corporation's or small partnership's tax returns.

Now don't get me wrong. Preparing a handful of accounting entries is expected. Especially for amounts you can't easily calculate--such as tax return depreciation.

If, however, your accountant or bookkeeper is making many other adjustments, you should verify that the accountant isn't adjusting accounts at year-end because you're not regularly tracking the account as you go through the year.

Heaven help you, for example, if your poor accountant finds himself or herself adjusting your cash accounts (this means you don't know how much cash you have--which is of course symptom #1 above) or making large adjustments to any other accounts such as inventory.

Large end-of-year adjustments means your accounting system means just one thing: The books aren't up to date with the financial realities of your operation. This lack of up-to-date information, sadly, means you may be flying blind.

Seattle CPA Stephen L. Nelson wrote the bestselling book QuickBooks for Dummies. He also edits the Do-it-yourself limited liability company LLC formation and the Do-it-yourself subchapter s corporation web sites.

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