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Analyzing Transactions | T Account Example | Accounting How To
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Oct 4, 2022
Analyzing Transactions | T Account Example | Accounting How To is a four part accounting tutorial that introduces three methods of analyzing accounting transactions: The Accounting Equation spreadsheet, T Accounts, and Journal Entries. It reinforces the concepts of debits and credits for beginners, gives an accounting general ledger tutorial, shows how to post to the general ledger, how to post to T accounts, how to figure balances for T Accounts and general ledger accounts and how to create a Trial Balance. This is an accounting tutorial for accounting students, business owners, and bookkeepers to explain accounting basics for beginners. Featuring Terrance the T-Account Rex and accounting educator, Caroline Grimm, this accounting tutorial is part of a playlist series called How to Pass Accounting Class. ⏰ Accounting How To Time Stamps 00:00 Introduction to Analyzing Transaction using T Accounts 01:02 Trial Balance Introduction 01:27 Transaction 1: Owner Investment 02:36 Transaction 2: Purchase Supplies on Account 04:16 Transaction 3: Cash received for revenue earned 05:10 Transaction 4: Pay rent 06:49 Transaction 5: Pay creditors on account 07:55 Transaction 6: Bill customers 09:46 Transaction 7: Pay expenses 10:05 Transaction 8: Pay salaries 10:18 Transaction 9: Supplies Expense / Supplies 12:46 Transaction 10: Owner withdrawal 13:44 How to Figure T Account Balances
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0:00
In this video, we are going to figure out how to use T-accounts in order to track transactions
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in accounting. Now T-accounts, now I explain T-accounts in my T-accounts video which I'll link down below
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but the basic concept is that we're using kind of a simplified version of accounts here
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that are in the shape of a T and therefore called T-accounts. And as you know, Terrence thinks T-accounts
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are named after him. We'll let him think that. But by the time we're done, you are going to be able to
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T-account with the best of them. So let's jump right into our sample transactions. We're using
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them in the spreadsheet version, and we're using them in the journal entry version. This is our T-accounts
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version. Now I want to introduce also in this lesson the idea of a trial balance. When we did
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our spreadsheet version, we checked this based on our extended accounting equation, assets equal
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liabilities plus equity. In this case, we're going to use this handy dandy thing called a trial
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balance. And it's going to do the same thing for us, but in a much easier format to follow
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So here we go. First transaction. Joe Smith opens his business June 1st. He is in the property
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management business. And the first thing that he does is he puts $55,000 into the business as an
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investment. And this is going into our new business checking account. So what's going on with this
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transaction. We are increasing the cash in the business and we are increasing Joe Smith's equity
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So how are we going to do that in a T account? We're going to come over here, debits on the left
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credits on the right. We want to increase our cash, which is an asset, has a normal debit balance
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So we are going to debit cash, $55,000. Boom. And we want to increase Joe Smith's equity in the
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business. We're going to do that by crediting his capital account. This is an equity account
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That's a normal credit balance. So we're going to increase it on the credit side. Boom. Transaction
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number one done. So then what happens? We are going to purchase office supplies on account
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for $3,300. So what does that mean? What are we getting? We are getting supplies. And remember
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this is our supplies asset account, not our supplies expense account. Okay. So here's our
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asset. Here's our expense. Do not get those confused. Our supplies asset account acts like
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an inventory account. So what are we getting? We are getting $3,300 in supplies, our asset
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So there we go. We are debiting supplies. It's an asset account. So we debit it by increasing it on
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the left-hand side, on the debit side. So supplies, the asset is an asset account as a normal balance
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that is a debit. And so we're going to increase it by debiting it. So there we go. Left-hand side
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of the account, debits on the left, credits on the right. And then what is the other side of this
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transaction? Have we paid for these supplies yet? We have not. And we know that because it says
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we bought them on account. On account, we ain't paid for them yet. So we now have a liability
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There's money that we owe to someone else. So we are going to go over to our accounts payable account
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Accounts payable is a liability as a normal credit balance. So we increase it on the credit side
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So now we're saying we have a liability. We owe this money to somebody else
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So there we go with that transaction. What happens next? We received cash from fees earned for managing rental property
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$18,300. So the thing that we do in our business to make money is we sell our property management
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services. So $18,300. We're going to come over to our fees earned revenue account. Revenue has a
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normal credit balance. So we're going to increase it on the credit side for $18,300. Now, have we
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gotten paid for this In this case it says very specifically received cash So yes we did get paid So we want to come over here to our cash account and we want to increase it It a debit balance Normally we going to increase it on
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the debit side for $18,300. Oh, look at us just debiting and crediting like mad men and women
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So then we're going to pay rent $8,300. Well, where is this rent money going to come from
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It's going to come from our cash account. So because this is an asset and we want to reduce it
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we're going to go to the credit side. So a credit reduces an asset
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And we're going to say we want to reduce our cash account by $8,300
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dollars. Now you will notice we do not use a minus sign here. We do not use a minus sign or a plus
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sign anywhere within our T accounts because this already means minus. So when you put a credit
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in your cash T account, you are saying we are subtracting this. We are reducing our balance
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So I don't want to see any minus signs turning up in your T accounts because I will point at you
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and laugh. Not really, but okay. If it helps, that's what I'm doing. Don't do it. Just don't
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do it. All right. So we are paying out cash. What is the other side of this transaction
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Well, we're paying rent expense, right? So we want to come over to our rent expense T account
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and we are increasing our rent expense. So we are going to debit that because an expense has a
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normal debit balance. So we are going to increase it by debiting it for $8,300
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What happens next? Well, we're going to pay creditors on account for $2,290. So what's going
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on here? We have one creditor that we know of, the only transaction that we've had. So we can
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assume that we're paying this office supply vendor. We're not paying the whole bill because
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we owe them $3,300, we're only paying $2,290. So when we're done with this transaction, we will no
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longer owe $3,300. So we're going to record what we are paying, which is $2,290. Because
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accounts payable is a liability, it has a normal credit balance. So if we want to decrease it
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we're going to debit it. Okay. And then what's the other side of this transaction going to be
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We paid cash in order to pay our bill. That's usually the way it works
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So we want to reduce our cash balance by 2290. We do that by crediting it
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And then something exciting happens. We're actually going to make some revenue again
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Don't we love it when we make revenue? It's great. So we build our customers for fees earned for $30,800
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So we have revenue, revenue, normal credit balance. We're going to increase it on the credit side
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So $30,800. And then did we get paid for this yet? We did not. It says we build our customers
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It didn't say we got paid. So that means that our customers are going to pay us on account
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They're going to pay us later. So we want to come over here to our accounts receivable
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asset account and record that we are going to get paid later on $30,800 by our customers
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The next thing that happens is we're going to pay some more expenses
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our auto expense and miscellaneous expense. Our auto expense is $13.80. It is an expense
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has a normal debit balance, so we're going to increase it on the debit side. And our
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miscellaneous expense, we're going to do the same thing. We're going to increase that by debiting it
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So where did that money come from? Well, it came from our cash account. So now what we want to do
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and you can do this two ways. You can either do this, record your 1380 and record your 1800
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or you can combine that and just make it one figure. In this case, I'm going to just leave it
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this way because if we do have a mistake somewhere, it will be easier to track that. So I can look at
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this and say, yep, we took care of that 1380. Here's the other side of it. Here's my 1800
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There the other side of it So I going to leave it that way just in case we run into any problems And then next we going to pay our salaries So our salaries expense is going to increase by
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and our cash is going to decrease by $7,300. Okay, so all of our cash decreases are on the credit side
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and this is based on our normal balances. And now comes the tricky little one that they like to throw in here
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just to see if they can trip you up. Okay. So we bought $3,300 of supplies
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So the next transaction that we're doing, it says that we determined that the cost of supplies on
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hand was $1,250. Therefore, the cost of supplies used was $2,050. So here's what's going on
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This is what's actually called an adjusting entry, which we don't even get to until chapter three
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So they're kind of just sort of sneakily introducing this idea. So we have in this supplies asset account, as I said, it works as an inventory account, $3,300 in supplies
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But we don't really have $3,300 in supplies anymore because we've used up a bunch of them
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So according to this transaction, we are saying that the cost of supplies on hand is $1,250
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So when we are done with this transaction, the balance in our supplies account should be what's left, what's on hand, $1,250
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So how do you get from $3,300 to $1,250? Well, we're going to reduce it by the cost of supplies used in 2050, which is the difference
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between what we started out with and what we ended up with. So we are reducing our supplies by this amount
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Now, what's the other side of that going to be? Well, when you use up an asset like an inventory account or supplies, we are going to turn
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that into an expense. So as you use up an asset like supplies or inventory, it becomes an expense
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So we're going to move that to the corresponding expense account called supplies expense
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So we're going to increase that by 2050. And what this is saying is that this is what we actually used
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So when we do our balances on this supplies account, we will magically, if I've done my
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math right, end up at $12.50 for a balance. And then the final transaction that we're doing for
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this month is we have Joe Smith withdrawing cash for personal use of $13,800. So we know right away
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that our cash is reducing. So we're going to go over here and credit that. And then we're going
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to come over here to our drawing account. And we want to debit this drawing account. A drawing
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account withdrawals, dividends, has a normal debit balance. And we are going to increase that. So
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we're coming here on our debit side. And this is a good time to talk about how these two, how these
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two accounts work together. So they're both equity accounts, right? So if we were to take
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this 13,800 and we were to put it over here, the net effect will be that we are reducing
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Joe's capital account overall by 13,800. But what we're doing instead is we want to keep track of
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how much money Joe has taken out of the business. So here's what he's put into the business
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and here's what he's taken out. So this will appear as two different lines
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on our financial statements. The effect is still the same. It's still owner investments minus owner's draw
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giving us a net owner's investment number. But we wanna keep track of it over here
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It has the same effect on capital as if we were to put it over here as a debit
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It's reducing the amount of capital that Joe Smith has in his business
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But we want to keep track of it separately. That's why we do that
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So now we have done all of our transactions, and it's time for us to figure out our balances
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So I'm going to start here with our accounts receivable. So our balance is $30,800
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That's pretty simple to do since there's only one transaction. Now let talk about our supplies account We have a debit and we have a credit So when we doing a balance for these accounts we going to take our debits
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and we're going to subtract our credits. So in this case, when we use the magic of Excel
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to figure this out, we're gonna take this minus this, and it's gonna give us a balance of, wait for it, $12.50
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Oh my gosh, it worked. This is great. So you don't want to put a balance on both sides. You want only this balance
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on one side. And this is a debit balance. The debits are greater than the credits. Okay
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Now let's come over here to our accounts payable. Accounts payable has a normal credit balance
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So you would expect to see your balance on the credit side. If it's on the debit side
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that is a clue that there may be a problem. There may not be a problem, but there may be a problem
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So let's see what happens when we take our credits minus our debits
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Whew, this is exciting. Don't you just love watching other people do math? It's so fun
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All right, so that gives us an accounts payable balance of $1,010. This is what we still owe
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to our vendor. Here we're going to take our $55,000. We're just going to bring it down our $13,800
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because we only have one transaction in those accounts. And then we are going to add up our
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revenue. And again, it has a normal credit balance. All of our transactions are on the credit side
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And same thing with our expenses. We're just going to bring those numbers down because there's only
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one transaction. Helps if you can type. And 1380 and 1800. Okay. So that's all of our balances
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except for this one. And I left this one for last. So cash is the account that's going to have the
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most activity in it. And so we got to make sure that we get all of our debit transactions minus
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all of our credit transactions to get to our cash balance. You would be expecting to see a debit
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balance because that is the normal balance for a cash account. It means you didn't spend all of
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your money. You could have a credit balance in this account if you outspend what you bring into
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your account. You know, you're basically overdrawn. But normally you're going to see this end up as a
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debit balance. So we're going to do a little adding. We're going to do a little subtracting
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And hopefully we end up with a balance that makes sense. So now what we're going to do in order to
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check to make sure that we have debited and credited in equal amounts is we're going to
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come over here to this trial balance. And all the trial balance is doing is saying, let's look at
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what the balances are in these accounts and make sure that we have debited and credited appropriately
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Now, it's not going to tell us whether we enter things in the wrong account. If we put our
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miscellaneous expense in our salaries expense account, it's not going to catch that error
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What it's only looking at is do our debits equal our credits? Because then we know that our
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accounting equation is in balance. So if it is a debit balance, we enter it on the left-hand side
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and then our accounts receivable, $3,800. Our supplies is now $1,250. Our accounts payable
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has a credit balance of $1,010. It was over on the right-hand side. Our capital is $55,000
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And then we want to jump back to the debit side for our drawing account
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Our fees earned is a credit balance. And then our expenses are debit balances
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So $300, $20,50, $13.80, carry the one, take out the trash. And there we go
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So we are in balance. Isn't that awesome? Isn't that a great feeling
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Oh, so great. So there you have it. We have walked through our transactions using T-accounts
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And again, this spreadsheet will be available for you to download it
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It's in the description. And it's going to include the transactions, the chart of accounts that we're using for these transactions
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and then our three different ways of doing this, our spreadsheet version, our T-accounts, and our journal entries
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So until next time, stay balanced, my friends
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