2.11:Understanding the learning objectives
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• An account is a storage unit used to classify and summarize money measurements of business activities of a similar nature.
• A firm sets up an account whenever it needs to provide useful information about a particular business item to some party having a valid interest in the business.
• A T-account resembles the letter T.
• Debits are entries on the left side of a T-account.
• Credits are entries on the right side of a T-account.
• Debits increase asset, expense, and Dividends accounts.
• Credits increase liability, stockholders' equity, and revenue accounts.
• Analyze transactions by examining source documents.
• Journalize transactions in the journal.
• Post journal entries to the accounts in the ledger.
• Prepare a trial balance of the accounts and complete the work sheet.
• Prepare financial statements.
• Journalize and post adjusting entries.
• Journalize and post closing entries. Prepare a post-closing trial balance.
• A journal contains a chronological record of the transactions of a business. An example of a general journal is shown in Exhibit 11. Journalizing is the process of entering a transaction in a journal.
• Posting is the process of transferring information recorded in the journal to the proper places in the ledger.
• Cross-indexing is the placing of (1) the account number of the ledger account in the general journal and (2) the general journal page number in the ledger account.
• An example of cross-indexing appears in Exhibit 10.
• A trial balance is a listing of the ledger accounts and their debit or credit balances.
• If the trial balance does not balance, an accountant works backward to discover the error.
• A trial balance is shown in Exhibit 13.
• Horizontal analysis involves calculating the dollar and/or percentage changes in an item from one year to the next.
• Vertical analysis shows the percentage that each item in a financial statement is of some significant total.