Why We Use T-Accounts for a Visual Representation of Entries
Accounting is the language of business, and therefore has implications for the larger topic of finance. What’s more, so much of the foolishness that we are attempting to unwind, deleverage, or otherwise make sense of in our present time is the result of either the flat out lies that have existed on financial statements, or as is often the case the plentitude of ignorance on the part of those (ostensibly) reading financial statements and making recommendations based on them. So in other words, details matter.
Sometimes accountants use a visual representation to map out correcting entries that need to occur during the accounting cycle. I really think it functions a lot like a word picture. So take the analogy one step further in the review and close process of the accounting cycle and there are correcting journal entries to be made. Why? Because when you involve humans in a process, there will always be imperfections. Similarly, though someone may be truthful in what they record in a diary, there are certainly points of accuracy that could be disputed if for no other reason, a difference in perspective.
T-Accounts are a visual representation of what is going on in the general journal (more about the general ledger later). I can remember countless times over the years where someone was trying to recreate the sequence of events and penciled out a T-Account to reenact what happened for reconciliation purposes. It is very much like a word picture and can be very helpful when trying to get to the bottom of a complicated mess. Remember the concept of temporary and permanent accounts and follow a simple transaction mapped out in a T-Account structure:
To record sales booked to a receivable:
To record cash collected on the receivable:
Question, what happens if this receivable is deemed uncollectable? Hint: it involves a temporary and a permanent account. Application: think of the present state of the banking industry.
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