How to Record Business Transactions in T Accounts
- 1). Understand the different types of accounts. Accounting is made up of five different types of accounts, and each type has its own rules regarding its normal side balance. Assets are accounts that represent things of value. Liabilities are accounts that represent amounts a business owes. Equity accounts represent ownership rights. Expense accounts track business expenditures. Revenue accounts track money earned. Asset and expense accounts have normal debit balances, which means that debits increase the balance in the accounts. Liability, equity and revenue accounts have normal credit balances, which means that credits increase the balance in the accounts.
- 2). Determine the accounts affected by a transaction. Every transaction affects at least two accounts. In the accounts, debits and credits reflect the amount of the transaction. The debits and credits made for each transaction must equal each other. For example, if a company were to purchase supplies for $100, the two accounts affected would be the asset account called Supplies and a liability account called Accounts Payable.
- 3). Post the transaction in T accounts. A T account is simply the letter "T", containing the account name on the top of its horizontal line. The "T" is divided down the center, which allows for debits to be placed on the left side and credits on the right side of its vertical line. To post the transaction in the example above, place $100 on the left side of the Supplies T account; this represents a debit to Supplies. In addition, place $100 on the right side of the Accounts Payable T account; this represents a credit to Accounts Payable.
- 4). Post all transactions. Each time a transaction occurs, post the amounts involved in the correct accounts on the correct sides of the T account. For example, if your company receives a utility bill for $250, post this by placing $250 on the debit (left) side of the Utility Expense account and $250 on the credit (right) side of Accounts Payable. When your company pays the bill, place $250 on the debit side of Accounts Payable and $250 on the credit side of the the Cash account.
- 5). Balance out your T accounts by using the normal side balance. Add all amounts on the normal side and subtract all the amounts on the opposite side. For assets, add up all amounts on the debit side. Any amounts on the credit side represent amounts paid out; you should therefore subtract them off the balance. For example, assume the Accounts Payable account has one debit posting of $200 and three credit postings of $100, $250 and $300. Balance this out by adding the three credits together and subtracting the debit from their sum. Since the credit postings total $650 and 650 - 200 = 450, the balance of this account is $450.
