Category: Accounting

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

What are T Accounts?

If you want a career in accounting, T Accounts may be your new best friend. The T Account is a visual representation of individual accounts that looks like a “T”, making it so that all additions and subtractions (debits and credits) to the account can be easily tracked and represented visually.

Debits and Credits for T Accounts

When most people hear the term debits and credits, they think of debit cards and credit cards. In accounting, however, debits and credits refer to completely different things.

Debits and Credits are simply accounting jargon that can be traced back hundreds of years and that is still used in today’s double-entry accounting system. A double-entry accounting system means that every transaction that a company makes is recorded in at least two accounts, where one account gets a “debit” entry while another account gets a “credit” entry.

These entries are recorded as journal entries in the company’s books.

Debits and credits can mean either increasing or decreasing for different accounts, but their T Account representations look the same in terms of left and right positioning in relation to the “T”.

T Accounts Explained

The left side of the Account is always the debit side and the right side is always the credit side, no matter what the account is.

For different accounts, debits and credits can mean either an increase or a decrease, but in a T Account, the debit is always on the left side and credit on the right side, by convention.

Let’s take a more in-depth look at the T accounts for different accounts namely, assets, liabilities, and shareholder’s equity, the major components of the balance sheet or statement of financial position.

For asset accounts, which include cash, accounts receivable, inventory, PP&E, and others, the left side of the T Account (debit side) is always an increase to the account. The right side (credit side) is conversely, a decrease to the asset account. For liabilities and equity accounts, however, debits always signify a decrease to the account, while credits always signify an increase to the account.

Understanding T-Account

In double-entry bookkeeping, a widespread accounting method, all financial transactions are considered to affect at least two of a company’s accounts. One account will get a debit entry, while the second will get a credit entry to record each transaction that occurs.

The credits and debits are recorded in a general ledger, where all account balances must match. The visual appearance of the ledger journal of individual accounts resembles a T-shape, hence why a ledger account is also called a T-account.

A T-account is the graphical representation of a general ledger that records a business’ transactions. It consists of the following:

• An account title at the top horizontal line of the T
• A debit side on the left
• A credit side on the right

Why Do Accountants Use T Accounts?

Accountants use T accounts in order to make double entry system bookkeeping easier to manage.

A double entry system is a detailed bookkeeping process where every entry has an additional corresponding entry to a different account. Consider the word “double” in “double entry” standing for “debit” and “credit”. The two totals for each must balance, otherwise there is an error in the recording.

A double entry system is considered complex and is employed by accountants or CPAs (Certified Public Accountants). The information they enter needs to be recorded in an easy to understand way. This is why a T account structure is used, to clearly mark the separation between “debits” and “credits”.

It would be considered best practice for an accounting department of any business (that is not using a single entry method of accounting) to employ a T account structure in their general ledger.

Introduction to Debits and Credits

Did you know? You can earn our Debits and Credits Certificate of Achievement when you join PRO Plus. To help you master this topic and earn your certificate, you will also receive lifetime access to our premium debits and credits materials. These include our visual tutorial, flashcards, cheat sheet, quick tests, quick test with coaching, and more.

What are debits and credits?

Debits and credits are terms used by bookkeepers and accountants when recording transactions in the accounting records. The amount in every transaction must be entered in one account as a debit (left side of the account) and in another account as a credit (right side of the account). This double-entry system provides accuracy in the accounting records and financial statements.

The initial challenge is understanding which account will have the debit entry and which account will have the credit entry. Before we explain and illustrate the debits and credits in accounting and bookkeeping, we will discuss the accounts in which the debits and credits will be entered or posted.

The Double-Entry Accounting System

Double-entry bookkeeping was developed in the mercantile period of Europe to help rationalize commercial transactions and make trade more efficient. It also helped merchants and bankers understand their costs and profits. Some thinkers have argued that double-entry accounting was a key calculative technology responsible for the birth of capitalism.

The accounting equation forms the foundation of the double-entry accounting and is a concise representation of a concept that expands into the complex, expanded and multi-item display of the balance sheet. The balance sheet is based on the double-entry accounting system where total assets of a company are equal to the total of liabilities and shareholder equity.

Essentially, the representation equates all uses of capital (assets) to all sources of capital (where debt capital leads to liabilities and equity capital leads to shareholders’ equity). For a company keeping accurate accounts, every single business transaction will be represented in at least of its two accounts.

For instance, if a business takes a loan from a financial entity like a bank, the borrowed money will raise the company’s assets and the loan liability will also rise by an equivalent amount. If a business buys raw material by paying cash, it will lead to an increase in the inventory (asset) while reducing cash capital (another asset). Because there are two or more accounts affected by every transaction carried out by a company, the accounting system is referred to as double-entry accounting.

This practice ensures that the accounting equation always remains balanced – that is, the left side value of the equation will always match with the right side value.

How do I market my bookkeeping business?

Marketing your business doesn’t have to involve expensive advertising campaigns. Your marketing plan should also be largely focused around on-going initiatives that are still manageable during your busy times, not just when things get quieter.

Here are 6 ideas you can add to your marketing plan to help you boost your bookkeeping business without massive monetary investment:

• Pro-bono work

Offer your services to help out a local community group or charity organisation. I know this might sound counter-productive, after all, you’re trying to make money, not give it away, right? However, offering your services pro-bono can have a flow-on effect as you build your networks and lift your profile in the community. You never know who else you can get your business in front of! Ask if your logo or current promotions can be included in community newsletters or if you can advertise with business cards or a poster in return for your services. Commit to at least 6 months and then re-evaluate to see if your business is getting anything out of the relationship – although you might find that simply giving back is benefit enough!

• Provide helpful free resources

Become known as a reliable source of expert, up-to-date knowledge around accounting, compliance, best practice, and business hacks.

These resources could include:

• regular blog articles on your website
• a monthly newsletter with advice and helpful links
• contribute guest posts on other blogs
• ‘How-to’ videos or demos

Make sure to capture email addresses through download forms or subscriber options, so that you can then continue to nurture the potential lead relationship through emails.

• Incentivise referrals

Make the most of your biggest fans – your existing customers. Ask them to refer your services to their own networks, and if necessary, incentivise this by offering them a ‘reward’ for any new leads, or new business won, such as an hour off their next fee, a voucher or a free lunch. Remember: give to get! Make sure you are also out there actively offering referrals to other businesses in your networks if you expect others to do the same.

• Face-to-face networking

Don’t underestimate the power of face-to-face networking. Yes, it might seem like a lot of time investment, but building strategic relationships is the most critical part of marketing your business. Attending networking events is not just about finding new clients (although obviously that should also be your aim!), it’s also about meeting other business owners who may be great sources of continued referrals to your ideal clients. Consider joining a local networking group that meets fortnightly or monthly (they are usually around an hour and will often be held over breakfast, so won’t eat into your day), and take up opportunities to attend various industry events. However, make sure you do your research and consider whether other attendees are going to fit into your target customer before you invest time or money.

• Connect with others in your industry

One of the things that was evident to me at the recent Xerocon Auckland event was what a tight and supportive industry bookkeeping is. Bookkeepers are awesome at helping out others in their industry, rather than simply seeing them as competitors. Make the most of these alliances – when you do find you have too much work on your plate, you have a client that’s not quite right for you, or perhaps they want to work with someone a little closer to home, don’t be afraid to refer leads on to other bookkeepers – you’ll find that they will do the same! Be sure to network and connect with other bookkeepers, ask questions, offer advice, provide commentary on industry events and participate in online discussions.

• Online networking

A big part of connecting with other bookkeepers will likely revolve around online forums and communities. These present a great opportunity to build relationships, learn from others, and increase referral opportunities. Consider your target audience before you invest too much time in social networking. For example, if you’re targeting business owners, you’ll likely have the most success using LinkedIn to promote your services, rather than Facebook. Join groups and get involved in the discussions. Once you feel confident, start your own threads by posing questions and posting your blogs.

Don’t forget word of mouth

Ads, articles, social posts and speaking gigs are great – but there’s nothing like getting a recommendation. An endorsement from one business owner to another carries a lot of weight. Plus clients tend to recommend other business owners like themselves, so you know what you’re going to get. Your work is one of your biggest and best advertisements.

How to get the word out

• Check out these guides on promoting a bookkeeping or accounting practice.
• Build a professional website
• Perfect your elevator pitch
• Writing to promote your bookkeeping business
• Get referrals through word-of-mouth marketing
• Create an SEO strategy to help people find you

Have Various Marketing Strategies

How can your business possibly generate 6 figures in revenue if nobody knows who you are?

Unfortunately, solely word-of-mouth advertising won’t do the trick. You’ll need to have more additions to your marketing tool belt.

Introducing the 7×5 Marketing plan.

It features 7 different strategies, if used properly, that will get you at least 5 new clients per year. The methods are:

• Talking to people you know
• Networking,
• Mailing flyers or postcards,
• Door-knocking,
• Approaching accountants,
• Utilizing referrals and
• Using your website & online.

Many bookkeepers don’t like marketing, but if you truly want a 6-figure business, you’ll need to do things outside of your comfort zone.

Think about it like this, if you commit right now to doing things your competitors don’t want to do, you’ll later be living the glorious life they won’t have because of your commitment to marketing and other uncomfortable actions which helped your bookkeeping business flourish.

Treat a No as a Future Yes

You read that right. In the world of bookkeeping, you never know what will happen. Therefore, treat each lost lead as a potential future lead. Once you learn they have gone with someone else or simply don’t want to work with you to try and learn why so you can learn from the experience. Moreover, ensure to send them a closing email thanking them for their valued time and offer them a free value-added gift such as a free 15-minute consultation, your top bookkeeping tips for business owners or whatever comes to your mind. This goodwill and business sense will help them remember you in the future if they are in the hunt for a new bookkeeper again.

What is Lead Generation?

Before you even start thinking about your follow-ups you need to first create a lead generation strategy. Lead generation is the action or process of identifying and cultivating potential customers for a business; basically, it ties in with a Sales Strategy If you are looking to expand via marketing your bookkeeping business, you need to first understand that lead generation can be difficult and can take time but is always an ongoing process for businesses wanting to grow. In this digital age here are my top tricks for creating and implementing lead generation for your business.

Keep Clients Informed

You may only see many of your clients once a year at tax time, but you need to keep your name in front of them throughout the year so they don’t fall prey to a competitor’s marketing or go with an accountant referred by a friend. Use your vast knowledge of accounting and bookkeeping principles to keep your name in front of clients. Recruit new business by writing a weekly blog or monthly newsletter. Maintain a current email list and send out your informative articles as you create them. Post the information on your website and social media sites to provide fresh, useful content to your followers.

Network in Person

In addition to keeping up electronically, show up at local networking events to stay in touch with small-business owners looking for a new accountant or bookkeeper, as well as those contacts with whom you’ve already built relationships. Clients who’ve sent you business in the past are excellent sources of new referrals, especially when you’ve served their friends and associates well. Let them know about new services you may have added since you last spoke and find ways to send business their way in the spirit of reciprocity. Introduce yourself to other professionals and pass out cards and brochures at events put on by local groups such as the chamber of commerce. Peer groups that support accountants and bookkeepers also can provide useful connections, as many bookkeepers get more business than they can handle and need trustworthy, competent professionals to whom they can refer the overflow.