Accounting - The bookkeeping methods involved in making a financial record of business transactions and in the preparation of statements concerning the assets, liabilities, and operating results of a business.

System - A group of interacting, interrelated, or interdependent elements forming a complex whole.

Accounting System - the people, procedures, and resources used to gather, record, classify, summarize and report the financial information of a business, government or other financial entity.

Double-entry bookkeeping - the practice of recording a business transaction in two equal parts, called debit and credit entries. Debit refers to the left column and credit refers to the right column, in an accounting journal.

Each transaction describes both:
(1) the object of the transaction - such as rent, telephone, or payroll expense; sales, fee or interest revenue.
(2) the source of payment - cash or credit.

Money eventually changes hands in (almost**) all transactions, either at the time of the transaction, or perhaps at a future date in the case of items purchased on credit.

Sometimes a transaction involves cash directly, at the time of the event, such as a cash sale at a grocery store. It is more common, and safer, to use a checking account for routine purchases. These are all considered part of the Cash account.

Many, and perhaps most, transactions in a business take place on a credit basis. Businesses usually purchase their supplies and merchandise on a 30-day account, known as a trade account, or Accounts Payable. Sales are typically made in a similar fashion, called Accounts Receivable.

**Adjusting and closing entries are not typical, and represent special entries made by accountants to prepare financial statements, and reset certain accounts at the end of a fiscal year.

Understanding Debit & Credit:

Debits and Credits
Journals and Ledgers can be viewed as pages of a book. Each page has lines and columns. A journal page has columns for the date, account name, and
two columns for dollar amounts, referred to as the Debit and Credit columns.

Sample General Journal page

Debit = Left column       Credit = Right column

We enter dollar amounts in the Debit and Credit columns.
And the totals in the Debit and Credit columns must be equal.

T-Account defined

A T-Account is a template or format shaped like a "T" that represents a particular general ledger account. Debit entries are recorded on the left side
of the "T" and credit entries are recorded on the right side of the "T".
It is a tool for organizing journal entries and analyzing accounting transactions.

Working with T-Accounts

There are a few business owners or managers who have a fantastic ability to remember details, but I would venture to say that most of us find our memory diminishing over time. T-Accounts come in handy when a series of journal entries are required and it becomes too difficult to keep all of them in your
head. When solving accounting problems, you have to think of accounting transactions in terms of the accounting model.

The accounting model is a template you can use to remember how debits and credits work. The two most common scenarios for using T-Accounts are:
1) Determining why certain transactions were previously posted to the general ledger; or,
2) working out the most appropriate place to post certain accounting transactions.

T-Accounts work because they are visually effective. This means they are simple to understand and usually it is possible to portray all the T-Accounts on one page. Let's look at a basic accounting transaction and then translate it into T-Account form.

Assume you sold an accessory to one of your rental inventory assets for $35 cash and deposited the money into the bank. You originally bought the accessory for $20 and put it into inventory until it was sold. The journal entries for the transaction would look like this:

The T-Accounts would look like this:

          Cash                                       Sales                           

 35.00       |                                             |       35.00                         

    Cost of Goods Sold                       Inventory       

20.00         |                                        |  20.00

You can easily see that the debits equal the credits. Let's look at a more complex accounting transaction. You bought a company van to delivery your rental inventory for $25,000 and you did this by putting $5,000 down and setting up a liability (Notes Payable) for $20,000.  You made your first payment of $380, of which $80 was interest, and your first month's depreciation was $833. To the unfamiliar, these transactions might appear confusing until
T-Accounts are used.

Fixed Assets-Van                      Cash                              Notes Payable

25,000   |                                   | 5,000                                | 20,000

Notes Payable             Interest Expense                     Cash          

300     |                           80     |                             |  380

Depreciation Expense         Accumulated Depreciation             

  833        |                                    |          833

A critical step is to make sure that the debits equal the credits. If not, you have made a mistake that must be solved. Next, simply put these T-Accounts in journal entry form:

Remember that every account in the general ledger is a T-Account.
Drawing the T-Account is just another way to portray the account. I can't count the number of times that I have used the back of a napkin to draw
T-Accounts to explain accounting concepts to clients. I can't remember one time that a client was not able to follow me even though his/her accounting knowledge was minimal. The beauty of T-Accounts is their simplicity.