The basic T account is a useful bookkeeping tool used to help visualize double entry bookkeeping journal entries. The debit entries are posted to the left hand side of the T account, and the credit entries are posted to the right hand side of the T account. The 3 column ledger account extends the T account by using an additional third column to show the running balance on the account after each debit or credit entry.
3 Column Ledger Accounts Example
To demonstrate the use of the three column ledger account the transactions on a typical account (in this case a customer accounts receivable account) are shown below.
In this example typical transactions include sales on account made to customers, which are debit entries to accounts receivable, and cash receipts from customers which are credit entries. After each entry the running balance on the account is calculated and identified as being either a debit or a credit balance. As accounts receivable represent amounts due from customers the balance is normally a debit balance.
Running Balance Method
The 3 column ledger account provides information on the balance on the account after each debit or credit entry has been posted, for this reason it is often known as the running balance method. This is in contrast to the period balance method in which account balances are calculated only at the end of the accounting period.
The advantage of the three column ledger is that the balance on an account is available to the user at any point in time. In the above example for instance, the amount due from the customer shown on the accounts receivable account is known after each transaction 1,000, 2,200, 900, 1,700, and finally 100. In the period balance system the balance is only known at the end of the accounting period, in this case 100.
While the balance on the account is useful information, in a manual accounting system it needs to be calculated after each debit or credit transaction, increasing the time spent in maintaining the bookkeeping records and the possibility of errors being made. For this reason in a manual system it is normal to only use the running balance method for accounts with a high volume of transactions where the balance might be needed with regular frequency. Typical examples of such accounts include the cash book and customer accounts receivable and supplier accounts payable accounts. The remaining accounts can them be maintained using the periodic balance method.
Obviously in a computerized accounting system these issues do not arise as the balances are calculated automatically.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.