Hello, welcome to this lecture today. My name is Justin light from think numbers, and today I'm going to be talking to you about T accounts. So, before we get into the transactional side of accounting, it's important that we introduced the T accounts to you so you understand how they work. And it is an extension of the Kenny equation, and they are also known as ledger accounts. So as you recording the previous lectures, we talked about the accounting equation of assets equals liabilities plus owner's equity. And the assets when they increase they get debited.
When they decrease to get credited, and liabilities when they increase they get credited and when they decrease, they get debited, and owner's equity which is the shareholders capital as well as profits, which is revenue revenues and expenses. If it increases, it gets credit it and it decreases, it gets debited. So what's important to understand are that the debits are on the left, and the credits are on the right when it comes to T accounts, it's got nothing to do with the accounting equation, whether it's on the asset side or the liability side or owner's equity. This is purely to do a T accounts debits on the left credits on the right, so let's jump into it. So, if we look at an example here of an accounts receivable T account, you can see that the shape of it is in a T with a vertical line and a horizontal line.
As I mentioned, the debits on the left and the credits on the right and this will apply whether it's an asset liability or owner's equity, it doesn't matter what account you actually use, it will always be a debit on the left and credit on the right. So in this example, we will always start with balance sheet accounts with an opening balance. Now if it's an asset account, it will always have a debit or Pulling balance. Unless it's a contra asset, in which case it will have a credit opening balance. And if it's a liability and owner's equity, the liabilities will have an opening balance on the right side being a credit. And if it's an owner's equity account, which is the only accounts that will have opening balances will be the share capital retained earnings as well as the reserve accounts, they'll always have a credit balance opening balance unless the retained earnings has a loss position as an opening balance, in which case it would be a debit.
So we'll be getting to this more detail as we go through examples. So in this example, we have an accounts receivable account. It's an asset account, and it has an opening debit balance. Now let's say for example, that we have a sale transaction. And what actually happens is when you have a sale on credit account, you actually debit the accounts receivable account. And the credit side is a separate T account, we'll go into the sales account.
So I've put here The sales has driven the accounts receivable to go up by debiting it. Let's say for example, then a couple of days later, there's another transaction. And there's another sale again, this account gets gets debited by another sale account because someone, a customer has purchased something on credit. Let's say for example, then the customer actually pays the invoice that was outstanding. And so the cash account actually goes up. So from the cash at Bank T account that will get debited, but the accounts receivable account will get credited and that's where these credits come in.
Then let's add a second customer who made the sale on the on the seventh his paid their account on the 12th. Again, the accounts receivable account gets credited because the customer actually paid the actual account and the other side of this journal will be sitting on the cash bank account. Let's say for example, on the 19th another sale occurs and again that gets debited to our cash. Disable account. And let's say for example, a day later that that account actually gets written off, because for some reason, the invoice has gone bad because the customer went bankrupt. So for example, in which case a credit will actually get credited to the accounts receivable, and the debit would actually go to the allowance for doubtful debts in this case.
So these are a number of transactions that occur throughout a period of time. At the end of the period, we will total up all the debits, whatever is including the opening balance will total the credits, whatever's occurred during the period. And whatever the difference is, whether it's more debits or more credits will actually give a closing balance. And it will sit on whichever has the highest side. So say for example, we have more debits and we have credits for this accounts receivable account. Then we'll have a closing balance that sits on the debit side.
And normally you would expect an accounts receivable to be in debit because it's an asset account. So these is the concept of how T accounts work when we get into the top 20 transactions in the next lectures, you'll actually see this in practice, in terms of the different transactions and how they affect the T accounts. I just wanted to introduce the concept of a takeout ledger account, so you can understand it. And then as we get into the examples, you can put this into a bit of practice. Okay, so we're now going to go into the next lectures and we're actually going to go through the transactional side and we'll be talking about the top 25 transactions. We'll see them