T- Accounts ( ledgers) are summary of transactions related to asset, liability, income or expense.In this post, we understand how to prepare T accounts with example. Preparation of T accounts is the part of accounting cycle. We learn whole accounting cycle through series of articles.
How to Prepare T accounts :
We can prepare T accounts in two ways :
- Preparation of T accounts from direct transactions
- Preparation of T accounts after doing journal entries.
We learn second method for better understanding. Once you get grip on accounting, you can direct do ledger posting.
Preparation of T accounts after doing journal entries:
Journal entries are basis of accounting. Once you learn doing right journal entries, you learn half accounting. T accounts can be prepared using journal entry. We called it posting in ledger from journal entries.
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Rule of Debit and credit:
Following table presents rules for debit and credit. If you are new to journal entry concept, it will help. It is advisable to recognize ledger involved before making journal entry. Once you recognize the ledgers, it is easy to form the entry. ( Advice from my teacher. But it worked at my school time and today also) Debit means left side and credit means right side in ledger ( T Account)
|Expense increases||Debit expense|
|Income increases||Credit income|
|Asset increase||Debit asset|
|Liability increase||Credit liability|
|Asset decreases||Credit asset|
|Liability decreases||Credit liability|
|Capital increases||Credit capital|
Example of Ledger posting :
- XYZ ltd purchases goods worth $1000 from ABC ltd on credit.
Explanation: In this transaction, two accounts are involved. Purchase and ABC Ltd. As purchase increases, we debit purchase and Creditor balances also increases so we credit ABC Ltd. Entry will be as per following:
|Purchase a/c dr||$1000|
|To ABC ltd||$1000|
Now, we post this transaction to ledger. It is really easy. Dr transaction should be posted on debit side of ledger and Cr transaction should be posted on credit side of ledger.
|To ABC Ltd||1000|
|By purchase a/c||1000|
I hope you get some idea about ledger preparation. Let’s move to the other transaction.
XYZ ltd makes sale worth $ 4500 on cash.
XYZ has made sale. So income will increase and we credit sales account. Other side cash ( Asset) incresaes, so we debit cash account.
|Cash a/c dr||$4500|
|To Sales a/c||$4500|
|By cash a/c||4500|
Transaction: XYZ ltd purchases furniture worth $12000.
When we purchase furniture for business, we should debit furniture account as asset increases. We do not debit purchase account because furniture is not stock of business for the purpose of resell. Here, there is no clarity about nature of transaction ( Cash or credit), it is assumed that transaction is on cash basis because there is no name of supplier given. When there is name of party ( Supplier) given with no clarity, assume that transaction is credit transaction. When there is name of supplier given with ON CASH words, transaction is cash transaction.
Journal Entry :
|Furniture a/c Dr||$12000|
|To Cash a/c||$12000|
|By Furniture a/c||12000|
Transaction : XYZ ltd pays salary $12000 .
Explanation: In this transaction, Expense increases, so we debit salary account and bank balance ( Asset) reduces, so we credit bank account. ( Assuming that salary is paid by cheque).
Journal Entry :
|Salary a/c Dr||$12000|
|To Bank a/c||$12000|
Ledger posting :
|By Salary a/c||12000|
XYZ ltd incurres advertisement expenses of $1200 for new product – Q1.
In this transaction, advertisement expenses increases, so we debit advertisement expense. Other side, Bank decreases, so we credit cash account.
|Advertisement a/c Dr||$1200|
|To Bank a/c||$1200|
Posting in Ledgers:
|By Advertisement a/c||1200|
I have given examples about ledger posting. Now, I want from you to solve following two transactions your own.
- XYZ ltd receives money from ABC ltd $990 in full settlement.
- XYZ provides depreciation at 10% on assets annually.
I hope now you are clear about how to prepare T accounts. If you are serious about learning accounting, my accounting video course will help you to build powerful foundation.