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11. T-accounts

A useful tool for demonstrating certain transactions and events is the "t-account." Importantly, one would not use t-accounts for actually maintaining the accounts of a business. Instead, they are just a quick and simple way to figure out how a small number of transactions and events will impact a company. T-accounts would quickly become unwieldy in an enlarged business setting. In essence, t-accounts are just a "scratch pad" for account analysis. They are useful communication devices to discuss, illustrate, and think about the impact of transactions. The physical shape of a t-account is a "T," and debits are on the left and credits on the right. The "balance" is the amount by which debits exceed credits (or vice versa). Below is the t-account for Cash for the transactions and events of Xao Corporation. Carefully compare this t-account to the actual running balance ledger account which is also shown (notice that the debits in black total to $33,800, the credits in red total to $7,500, and the excess of debits over credits is $26,300 - which is the resulting account balance shown in blue).

CASH

25,000*

2,000

4,000

500

4,800

5,000

33,800

7,500

26,300

ACCOUNT: Cash

Date

Description

Debit

Credit

Balance

Jan. 1, 20X3

Balance forward

$ -

Jan. 1, 20X3

Journal page 1

$ 25,000

25,000

Jan. 4, 20X3

Journal page 1

$ 2,000

23,000

Jan. 8, 20X3

Journal page 1

4,000

27,000

Jan. 18, 20X3

Journal page 2

500

26,500

Jan. 25, 20X3

Journal page 2

4,800

31,300

Jan. 28, 20X3

Journal page 2

5,000

26,300

11.1. Comprehensive T-Accounting Illustration

The following diagram illustrating the flow of transactions from a general journal to a set of t-accounts may look rather "busy" but it is actually quite simple. The debits/credits for each entry can be traced to the corresponding accounts. Once all of entries are transferred, the resulting balances for each account can be carried forward to form the trial balance.

11.2. Chart of Account

A listing of all accounts in use by a particular company is called the chart of accounts. Individual accounts are often given a specific reference number. The numbering scheme helps keep up with the accounts in use, and helps in the classification of accounts. For example, all assets may begin with "1" (e.g., 101 for Cash, 102 for Accounts Receivable, etc.), liabilities with "2," and so forth. A simple chart of accounts for Xao Corporation might appear as follows:

No. 101: Cash

No. 102: Accounts Receivable

No. 103: Land

No. 201: Accounts Payable

No. 202: Notes Payable

No. 301: Capital Stock No. 401: Service Revenue No. 501: Advertising Expense No. 502: Utilities Expense

The assignment of a numerical account number to each account assists in data management, in much the same way as zip codes help move mail more efficiently. Many computerized systems allow rapid entry of accounts by reference number rather than by entering a full account description.

11.3. Control and Subsidiary Accounts

Some general ledger accounts are made of many sub-components. For instance, a company may have total accounts receivable of $19,000, consisting of amounts due from Compton, Fisher, and Moore. The accounting system must be sufficient to reveal the total receivables, as well as amounts due from each customer. Therefore, sub-accounts are used. For instance, in addition to the regular general ledger account, separate auxiliary receivable accounts would be maintained for each customer, as shown in the following illustration:

Therefore, sub-accounts are used. For instance, in addition to the regular general ledger account, separate auxiliary receivable accounts would be maintained for each customer, as shown in the following illustration:

The total receivables are the sum of all the individual receivable amounts. Thus, the Accounts Receivable general ledger account total is said to be the "control account" or control ledger, as it represents the total of all individual "subsidiary account" balances.

The company's chart of accounts will likely be based upon some convention such that each subsidiary account is a sequence number within the broader chart of accounts. For instance, if Accounts Receivable bears the account number 102, you would expect to find that individual customers might be numbered as 102.001, 102.002, 102.003, etc. It is simply imperative that a company be able to reconcile subsidiary accounts to the broader control account that is found in the general ledger. Here, computers can be particularly helpful in maintaining the detailed and aggregated data in perfect harmony.

 
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