Meaning of T Account Part 2

T accounts: principles

There are three principles that you should internalize about T-accounts. The logic of this principle is based on three pillars:

  • T account: applies to at least two accounts
  • There is at least one debit and one credit posting
  • The posting record is always debit to credit

Principle 1: Always affects at least two accounts

There is not a single business transaction that only affects the debit or credit side of the accounts. A T-account affects at least two accounts. Here is an example that illustrates this principle:

When you buy potatoes in cash, both the “Supplies” account and the “Cashier” account are in play. Because the “cash register” account changes because you pay for the potatoes in cash.

Principle 2: There is always at least one debit and one credit posting

According to Foodanddrinkjournal, the accounts concerned are always posted to different pages, one account changes in debit, the other in credit. We also want to illustrate this principle with the potato example:

A debit booking takes place at the moment you buy the potatoes. Why? The “Inventories” account is an asset account in which the debit transactions are posted. The cash account is also an asset account.

Principle 3: The posting rate is debit to credit

Let’s get back to our potatoes:

If you buy ten kilos of potatoes (3 euros per kilo), the amount of the debit entry would be 30 euros (the value of your supplies increases by this amount in the debit of the corresponding account). On the other hand, the value of the cash account also decreases by 30 euros (the cash balance in your cash register decreases by this amount in credit on the corresponding account). So the amounts (debit posting and credit posting) are the same.

How do I book correctly?

Post a booking record

What you need to know – the general formulation of a booking record is “debit to credit” .
This means that all accounts are listed with the value posted in the debit before the word “to”. On the credit side, all accounts are after the word “pending”.

Example: Posting a booking record

So if you want to post a cash deposit of 100 euros from the company’s coffers to your company account, the posting rate would be:

  1. Bank 100 euros at checkout 100 euros.
  • At the T-account cash register, you have to enter the amount over 100 euros on the credit side on the right (1. 100, -) which signals the access .
  • At the T-Account Bank, the 100 euros are then on the left on the debit side (1. 100, -), which shows the departure .

Basic booking rates

Ineffective bookings

The company’s annual surplus does not change with the so-called postings that do not affect income: only the inventory accounts are posted. The type of booking is often related to investments or transfers of funds (bank to cash register). We are also talking about a so-called active-active exchange or active exchange . In the case of refinancing (conversion of short-term to long-term debt), the passive-passive swap is often used.

Effective bookings

This is different with the so-called profit-effective bookings. This affects the annual surplus , because in addition to the inventory accounts, expense accounts or income accounts are posted to. This form of booking is often used for the sale of goods, but also for the purchase of raw materials or other services (e.g. telephone, energy or media). With these postings, the annual surplus is influenced because inventory accounts as well as income and expense accounts are posted.

Bookings with sales tax or input tax

As you know, the added value of a company is taxed. An added value arises, for example, when a raw material is processed into a new product. This can be iron ore that is made into steel, potatoes that are made into french fries or cotton that is used to make clothes.

Every self-employed person has to tax the added value that he has created. In these cases of processing (raw material product) the amount of the tax can be deducted tax-reduced by the tax of the previous stage of the product. This input tax must be recorded in the company in the so-called input tax account. At the end of the fiscal year, this amount will then be offset against sales tax.

Booking of fixed assets

This is a representation of items that are associated with the purchase of an asset. It is almost always an active-active exchange (cash purchase, etc.) or, as is the case with financing, a so-called active-passive increase. Impact on the balance sheet:

On the assets side, the fixed assets area increases here. Low-value assets , GWG for short, can be listed in full as business expenses in the year of purchase if they were not more than 150 euros. A separate account is therefore not necessary here.

For amounts between 150 and 410 euros, you can either use the GWG principle and then write it off in full in the year of purchase – or you can create a collective item (up to 1000 euros) and then write off the acquisitions over five years. Posting depreciation on property, plant and equipment is one of the non-cash items that reduce the company’s profits. LVA are posted in the same way (immediate depreciation or collective items).

Another booking account in connection with asset purchases can be the “asset sale” account. This lists the respective accounting records for the asset sales (either at book value, below book value or above book value). An investment can mean either a return or a loss for you.

Book goods purchases and sales

  • For purchases: You have to exchange the specified incoming goods account for the respective expense account if it is a question of reserve bookings.
  • For sales: Here you have to replace the respective accounts receivable with a cash account.

Complete T accounts

What do you have to enter in the debit and what in the credit side? First of all, the inventory accounts (at the end of the balance sheet) can be divided into active and passive accounts . For the accounts for the use of assets (active accounts) you must enter the opening balances and additions on the debit page. You note the outflows on the credit side. It is the other way around for passive accounts. The issues are entered on the debit side and receipts / opening balances on the credit side.

Posting to the profit and loss account

Finally, you have to close your success accounts on the so-called profit and loss account ( profit and loss ). For this purpose, your expense accounts are posted on the left-hand side (debit). The income accounts are on the right in credit. The P&L account is also known as the “equity sub-account” because it has a significant influence on this account. A profit arises when the income is higher than your expenses – the equity increases. If it is lost, it will decrease.

The difference between a chart of accounts and a chart of accounts

There are many accounts and sub-accounts in bookkeeping, all of which need to be classified and identified. The account framework is used for this . It is a predefined system of organization for all accounts in the bookkeeping. The difference to the account plan: While the account framework is usually defined as a basic structure for an industry or an economic sector, a chart of accounts describes the respective shares that a company uses from the respective framework. With the chart of accounts, you choose the accounts from a framework that suit your company.