Chapter 2

| You Will Learn...

1. To identify and explain the basic steps in the accounting process (accounting cycle). They are:

C Analyze business documents,

C Journalize transactions,

C Post to ledger accounts,

C Prepare a trial balance,

C Prepare adjusting entries,

C Prepare financial statements (using a work sheet or from the adjusted individual accounts),

C Close the nominal accounts, and

C Prepare a post-closing trial balance.

2. To analyze transactions and make and post journal entries. For example:

C Transactions are events that transfer or exchange goods or services between two or more entities.

C The data are recorded with journal entries using a system of double-entry accounting.

C The entries are subsequently posted to ledger accounts.

3. To make adjusting entries, produce financial statements, and close nominal accounts. Remember:

C Adjusting entries are made at the end of an accounting period prior to preparing financial statements for that period.

C At the end of each accounting cycle, the nominal or temporary accounts must be transferred through the closing process to real or permanent accounts.

4. To distinguish between accrual and cash-basis accounting.

5. To discuss the importance and expanding role of computers to the accounting process. Major points include:

C In the past, many companies used manual systems to record, classify, summarize, and report accounting data.

C Today, most companies use computers and electronic technology as an integral part of their accounting systems.

C In the future, technological advances will continue to significantly impact the accounting process of recording and reporting data for decision-making purposes.

6. To use special journals and subsidiary ledgers to process accounting information more efficiently and to provide additional useful information.

C This specialization allows for a division of duties among accounting personnel and usually results in greater efficiency, increased accuracy, and a higher degree of control.

C The most commonly used special journals are sales journal, cash receipts journal, purchases journal (or voucher register), and cash disbursements journal (or check register).

C Subsidiary ledgers provide the detail of individual accounts (e.g., accounts receivable subsidiary ledger) in support of a control account in the general ledger.

| Important Point

Adjusting Entries

You should analyze potential adjusting entries by using a logical approach such as the following. First, determine which accounts are affected and their desired ending balances. Second, determine how the related original transaction was recorded. Third, determine the change in the balances that is needed to adjust from the original balances to the desired balances. Repeated application of this method is a useful study strategy.