Final answer:
Debit entries are added on the left side of a T-account and represent assets, while credit entries are subtracted on the right side, representing liabilities and net worth. Net worth is calculated by subtracting total liabilities from total assets to ensure the T-account balances.
Step-by-step explanation:
On a T-account representing a firm's financial position, amounts are added on the left side (debit) and subtracted on the right side (credit). The left side lists assets, which include reserves, loans made, and securities like U.S. treasury bonds held by a bank.
The right side details the liabilities and net worth, which encompass what the bank owes to others, such as customer deposits, along with equity. The net worth is calculated as total assets minus total liabilities and is listed on the liability side to ensure the T-account balances.
A healthy business has a positive net worth, whereas a bankrupt firm would have a negative one. Nonetheless, the foundational accounting equation where assets equal liabilities plus net worth remains intact.
In accounting, when using a T-account, additions are made to the left side (debit) and subtractions are made on the right side (credit).
For example, if a company purchases inventory on credit, the inventory account will be debited (increased) on the left side and the accounts payable account will be credited (decreased) on the right side.
This is a fundamental concept in double-entry bookkeeping, which ensures that every transaction has an equal debit and credit entry, maintaining the balance of the T-account.