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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.

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