T-Accounts

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Do you remember what Credit and Debit mean in accounting? These are the accounts From and To respectively. Each of them may be responsible for rise or fall depending on the account it relates to. You may want to take note of the representation of the accounts below to remember how each transaction will be shown, but overall logic will make it simpler to implement on real-life examples.

The main 4 T-accounts are bigger ones, with each of them having a subset of smaller accounts. Let’s just quickly look at some examples to see the interaction on a more detailed level.

Buying an asset with cash

When you buy a car, you acquire an asset. If you finance your purchase from your current funds, you are using up existing assets (cash). Therefore both movements Credit and Debit will be under the asset account. You simply debit Car (increase in Asset) and credit Cash (decrease in Asset). You moved money from one type of asset to another. This movement will also be reflected in your Cash Flow statement, as cash outflow.

Receiving salary 

When you receive a salary, it is your income, which will be shown in Income Statement. But since you receive money either in cash or as a deposit to your account, your assets will be engaged as well. You have more assets – more cash – therefore you debit asset (account to) and credit Income (look at the picture, in Income credit means increase). You will also see this transaction in your Cash Flow statement as a cash inflow.