T-accounts and the chart of accounts — Accounting Module 5

Once you've grasped debits and credits as concepts, you need a way to track them per account. The T-account is the visual ledger every accountant has scribbled on a notepad since 1494. A horizontal line with the account name; a vertical line splitting debits (left) from credits (right). Add entries to one side or the other; the running balance is the difference.

T-account example

text

                  CASH
      ────────────────────────────
         DEBITS           CREDITS
      ────────────────────────────
      1,000,000  (1)          80,000  (2)
        100,000  (4)         100,000  (3)
         80,000  (5)
      ────────────────────────────
      Total: 1,180,000   Total: 180,000

      Balance: 1,180,000 − 180,000 = 1,000,000 (debit balance)

The Cash account after five transactions. Asset accounts normally have debit balances.

Normal balance for each account type

Assets: normal balance is DEBIT. Cash, inventory, equipment, receivables.
Liabilities: normal balance is CREDIT. Loans, payables, deferred revenue.
Equity / Capital: normal balance is CREDIT. Owner's capital, retained earnings.
Revenue: normal balance is CREDIT.
Expenses: normal balance is DEBIT.
Drawings / Dividends: normal balance is DEBIT.

Spotting an error fast

If your Cash account ends up with a credit balance (negative cash), either you made a posting error or you're overdrawn. Both deserve immediate attention but are very different problems. The 'normal balance' convention means experienced accountants can scan a trial balance and instantly flag anomalies — a debit balance on a Loan Payable account, a credit on Inventory, etc.

The chart of accounts

Every account a business uses lives in its chart of accounts (COA) — a numbered list maintained as a master document. Standard structure:

1000–1999: Assets (1100 Cash, 1200 Accounts Receivable, 1300 Inventory, 1500 Fixed Assets, 1700 Accumulated Depreciation as a contra-asset).
2000–2999: Liabilities (2100 Accounts Payable, 2200 Accrued Expenses, 2500 Short-term Loans, 2700 Long-term Debt).
3000–3999: Equity (3100 Share Capital, 3500 Retained Earnings, 3900 Drawings).
4000–4999: Revenue (4100 Sales — Product, 4200 Sales — Service, 4500 Interest Income, 4900 Other Income).
5000–5999: Cost of Goods Sold (5100 Materials, 5300 Direct Labour, 5500 Manufacturing Overhead).
6000–6999: Operating Expenses (6100 Rent, 6200 Utilities, 6300 Salaries, 6500 Marketing, 6700 Insurance, 6900 Depreciation).
7000+: Other (interest expense, FX gains/losses, tax expense).

Numbering with future room

Leave gaps. Use 1100 for Cash and 1200 for Receivables — not 1100 and 1101 — so you can insert 1110 (Cash – Operating) and 1120 (Cash – Reserve) later without renumbering the whole COA. Renumbering an established COA is a nightmare; planning gaps at the start is free.

Subsidiary ledgers vs control accounts

Some accounts have many sub-customers/suppliers. Accounts Receivable is one general-ledger account but has dozens or thousands of underlying customers, each with their own balance. The general-ledger account is the control account; the per-customer breakdown lives in a subsidiary ledger. Their totals must reconcile. When they don't, you have a posting error to find.

Exercise

Design a 15-account chart of accounts for a small Kenyan café. Use the numbering scheme above. Now post the following transactions as T-account entries: owner contributes KES 500,000 cash; café buys a coffee machine for KES 200,000 cash; café sells KES 5,000 worth of coffee (no inventory yet). What's the balance in each account?