When it comes to your company’s financial health, revisiting the basics every once in a while can actually bring new perspectives to current problems. Think of it this way: What do the world’s most famous sports coaches make their players do in the off-season? They practice the fundamentals. Sometimes the hotshot players ask, ‘Why do I need to do this practice? I already know it, and I’m best there is!’
The coaches have their team members practicing rookie-level drills because it serves as a way of training their minds and bodies to react with cat-like reflexes. It solidifies the fundamentals to become instinctual. The same concept applies to any profession, whether you’re a novice or an expert. Even if you know the fundamentals, there is a reason for the adage, ‘If you don’t use it, you lose it.’
That is why we are going back to the basics in this article to re-examine T-accounts. We’ll cover:
- The basics of an accounts payable T-account and how debits and credits work
- Why T-accounts are the basis of a good accounting system
- How to use T-accounts to focus your spend management
- Building on a solid foundation of expertise
What is an Accounts Payable T-Account?
First and foremost, a T-account is named for the way information is distributed in the columns. It refers to the visual presentation of double-entry bookkeeping. The left side of the ‘T’ is where a debit entry is recorded in the general ledger. The right side is where a credit entry is recorded. Each account — whether it’s accounts payable, accounts receivable, payroll, assets, etc. — will have its own T-account setup. The account title sits above the top bar of the ‘T.’
It can be a little confusing at first. But it’s important to remember that when a debit (left side) is entered into the journal entry, it will send a credit to a different account (right side). The same concept applies in the other direction. If you enter a transaction on the credit side in one account, there will be a corresponding entry on the debit side to another account. In this way, debits and credits increase or decrease the corresponding accounts to keep the books balanced.
T-Accounts and Their Role in Accounting Systems
The most common method for bookkeeping is the double-entry accounting system of T-accounts. For the balance sheet to be balanced, a business transaction entered into the system must take away from one account and add the same amount to another, and vice versa. The most common reason for balance sheet discrepancies is a ledger account entry erroneously placed on the debit side or credit side of the wrong account.
Where the idea of an accounts payable T-account gets a little confusing for even the most seasoned professional bookkeepers is ensuring the correct figure is applied to the correct side of the ‘T.’ It’s common to think of a debit entry as a subtraction to an account and a credit entry as an addition to an account. But this is not always the case.
Examples to Consider
For example, entering a debit (left side) transaction to cash accounts, accounts receivable, or asset accounts like inventory and PP&E will increase the account. When you enter a credit (right side) into these accounts, it will decrease the amount. But the exact opposite is true for the liabilities or shareholders’ equity accounts. When someone enters a debit journal entry, the amount decreases, and a credit will increase.
Income statements also rely on the accuracy of the accounts payable T-account journal entry to reflect accurate figures. Accounts that track expense accounts, revenue accounts, gains, and losses will use the debit/credit method in the same way as accounts receivable. A debit transaction will increase the revenue accounts, while a credit entry will decrease it. Conversely, a debit will decrease the amount for expense accounts, and a credit will increase it.
Case in point: If your business issues common stock, you would debit the cash account and credit the shareholders’ equity account to record this in your accounting system. However, let’s say an employee leaves before their shares are fully vested. They would forfeit their shares, and you would record it as a debit to the shareholder’s equity account and credit the cash account.
How Can an Accounts Payable T-Accounts Help Spend Management?
T-accounts allow a business to easily track their spending. You can see journal entries over a certain period of time. It’s the best way to track your business transactions. But it doesn’t necessarily help your business make wise decisions on managing spending intelligently. Accounting software tracks your company’s balance sheet and income statements. But it can only give you dynamic figures that provide superficial insight into ways to improve spend management.
The biggest problem with every fast-paced business is identifying areas that are bleeding money unnecessarily. Obvious signs in your financial statements — such as the accounts payable figure being much higher than the accounts receivable — stand out. But without 100% visibility into your spend management, you’re going to be left high and dry in ways of how to curb your spending. Worse yet, you may find some balances inflated or deflated, painting a picture that may not reflect reality. Working capital, cash flow, and your bank account will suffer as a result.
Streamlining Accounts Payable
Streamlining your accounts payable and account receivable processes may sound like a daunting task, especially if you have a significant number of vendors you deal with. But eliminating maverick spend means you need to find ways of gaining clarity into your company’s balance sheet. Simplifying your procurement process across different accounts with vendors is the first step toward reducing the time spent on the short-term process. This will significantly reduce money spent in the long term.
To help you understand what we mean, let’s take a look at the story of one of our customers, [solidcore]. As a health and wellness company, [solidcore] was expanding quickly with increasing demand for their products and services. In one year, they were able to double the number of locations from 25 to 50. That is explosively fast growth. But, explosive growth comes with a lot of chaos if you’re not properly prepared.
At first, [solidcore] had multiple different accounts across multiple vendors and multiple users. It was chaos trying to track their spending. The accounts payable department recorded receipts in the general ledger one by one. This led to a backlog. Without a proper purchasing management system, company executives couldn’t get real-time, accurate data on their cash flow, current assets, and expense accounts.
Since implementing Order, [solidcore] streamlined a process that once took at least two days and tons of back-and-forth on emails for 25 locations. Today, the process only takes about four hours across all 50 locations. Now, [solidcore] can see their spend at the product, location, and aggregate levels. With standardized processes steadily implemented in a more reliable manner, [solidcore] has much more transparency into their working capital and bank account balance than ever before.
Since implementing Order, [solidcore] streamlined a process that once took at least two days and tons of back-and-forth on emails for 25 locations. Today, the process only takes about four hours across all 50 locations.
Expertise Is the Crux of a Solid Business
Whether it is in the fundamentals or digging deep to find innovative ways for streamlining your accounts payable process, expertise requires your eyes to stay on the prize — but on all the surrounding hindrances, too. The figures on your company’s financial statements tell only a small part of the story, even though they reflect the bigger picture.
At Order, we’ve created one of the most comprehensive and user-friendly accounts payable management systems available. We’re leading the industry and raising the bar, and we want to help you do the same for your industry. We invite you to give us a try by requesting a free demo and a consultation with one of our knowledgeable representatives. They will help your business through all the fundamental drills that will lead to shooting the winning basket.