The accounting cycle consists, essentially, of five steps. One of these steps involves transferring the financial information from the journal entry to the ledger, where accountants keep a running balance of the funds in different accounts. (These accounts being the assets, liabilities, shareholders’ equity, revenue, expense and dividend accounts). These running balances are tracked in the ledger using a system called a T-account.
T-accounts get their name from how they are laid out on the page. Looking at the capital letter “T,” you’ll see it has a left side to the main vertical bar, and a right side. In the ledger, each account is represented by its own “T,” with debits appearing on the left side of the vertical bar, and credits on the right. As journal entries also employ a similar left side/debit and right side/credit structure, accountants can easily transfer (or “post”) figures from the journal entry to the T-account.
As the figures for every financial transaction are posted to the correlating T-accounts, either as a debit or a credit, a running tally ensues. In this way, as long as the ledger is kept up to date, accountants can immediately and easily calculate the balance in any given account at any given time. Without the T-account system, a request for an account balance would involve a time-consuming and possibly imperfect search back through all the journal entries in order to sort out all the transactions relating to that account.
The following T-account shows a cash (assets) account. The debits appear on the left and the credits on the right; the balance is $100,000.
Markle, K. (2004, August). Introduction to Accounting. Presentation delivered at Schulich School of Business, York University, Toronto, Canada.
Pratt, Jamie (2003). Financial Accounting in an Economic Context. New York: John Wiley& Sons.