Rent to own Accounting By John Day, MBA
Author of "Real Life Accounting for Non-Accountants"

Working with T-Accounts

There are a few Rent to Own 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". Click this link if you need to refresh your memory regarding 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:

DESCRIPTION		DEBIT	CREDIT
Cost of Goods Sold		20.00
	Inventory		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 deliver 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.

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.