What is a "T-Account"?

What is a "T-account"?

Quite simply, a T-account is a tool for analyzing a business's financial position through liabilities & assets. It's named for the T-shape that separates the data into two columns. 

Check out these other AP Macro resources:

• 5 Steps to Success in AP Macro
• AP Macro Formula Sheet

What does a T-account look like? 🧐

• this T-Account is for an individual business
• we always put assets on the left & liabilities on the right

A bank can also have a T-Account, & it looks like this. ⬇️

(They are also called Bank Balance Sheets)

Notice we have different terms than of an individual's T-account that corresponds to a bank's situation: loans, reserves, & deposits. There are 2 types of reserves: required and excess

• Required Reserves - The legal amount of deposits a bank MUST reserve, determined by the Fed - cannot be loaned out
• Excess Reserves - Any extra money reserved - can be loaned out

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Practice Problem

• (a) What is the reserve requirement?

• (b) If David deposits $10,000 into the bank, how much will the money supply initially increase?

• (c) What is the maximum increase in the money supply after David's $10,000 deposit? How do we utilize a T-Account?

• figuring out how much a bank can loan out or keep in reserves & therefore figuring overall how much the money supply has increased

• figuring out an individuals financial standing to find profits & losses

Answer to Practice Problem

• (a) The reserve requirement is 10%. Deposits are $1,000,000 and of that only$100,000, or 10% are reserved.
• (b) If David deposits $10,000, the money supply initially does not change! The money only changes composition.
• (c) Since we have a R.R. of 10%, the money multiplier is 1/0.1 = 10. 1000 dollars are required to be reserved, meaning 9000 can be loaned out. 9000 * 10 = $90,000 is the maximum increase in the money supply.