PBON Reviewer LIABILITIES- are payable to third parties.

They
may be accounts payables, notes payables,
ACCOUNTING - is defined as an information expenses payables, and mortgage payable.
system that measures, processes, and
communicates information primarily financial in OWNERS’ EQUITY- is the share of the
nature about an identifiable entity for the owners. It consists of owners’ investments (plus
purpose of making economic decisions. profit or minus accumulated losses and
withdrawals) retained in the business.
BOOKKEEPING - Is record keeping. It is a
task in the accounting process INCOME STATEMENT

STEPS IN THE ACCOUNTING PROCESS  Shows the sales or service income, and
the cost and the expenses of the business
1. Analyzing- Is looking over transactions for a period of time.
entered, examining economic events that  Reports a company’s profit or loss
have taken place, and determining their  It shows a company’s income, expense
effects on the business. and net income – also known as the
2. Recording- Involves the effects of “bottom line” or earnings
transactions and events that have been
analyzed. Other names for an income statement
3. Classifying- Is the sorting or grouping of include:
like transactions and events into specific - Profit and Loss Statement
account titles.
- Statement of Income
4. Summarizing- Is the process that involves
- Statement of Operation
grouping together of various accounts
- Statement of Earnings
referred to in the classifying process
- Results of Operations
5. Reporting- Involves the preparation of
- Statement of Consolidated Income
financial summaries called financial
- Statement of Comprehensive Income
statements.
6. Interpreting- Involves the computation and SALES AND SERVICE INCOME- are the
the study of relationships of figures from revenues or gross income from sales of
the financial reports. company’s goods and services
3 basic financial reports
COST OF SALES OR COST OF
1. Balance sheet SERVICES- are the direct costs of the products
2. Income statement sold or the services rendered.
3. Cash flow statement
CASH FLOW STATEMENT
BALANCE SHEET - Also known as Statement
of Financial Position. Shows the assets,  Flow statement
liabilities , and owners’ equity or owners’ share in  Periodic
the business as of a specific date.  Provides information regarding the liquidity
of a firm
ASSETS - are resources owned by the business.  explains the reasons for increase or
They are cash on hand, cash in bank, accounts decrease in cash balance from one balance
receivables, notes receivables, inventories, sheet date to the next
unused supplies, prepayments, land, building and  classifies the reasons for the change as an
equipment. operating, investing or financing activity.
  amount of net income in a period is usually 1. Journalizing – journalize the economic
different than the amount of increase in transactions and events
cash in the same period 2. Posting – post to the general ledger the
 reconciles net income with cash flow from journal entries in number 1
operations. 3. Trial Balance – prepare the trial balance
from the general ledger
4. Adjusting – adjust the ledger balances
Operations of Cash Flows 5. Financial statements – make income
statement and balance sheet from the
OPERATIONS- cash flows related to selling adjusted trial balance
6. Closing – close or transfer the income and
goods and services; that is, the principle
expense accounts to “income and
business of the firm.
expense summary account” and the
latter account to owners’ equity
INVESTING- cash flows related to the
7. Post Closing Trial Balance – make a trial
acquisition or sale of noncurrent assets.
balance of all assets, liabilities and owners’
equity accounts after having closed the
FINANCING- long term and short term cash income and expense accounts
flows related to liabilities and owners’ equity;
a. Reversing – reverse some adjusting
dividends are a financing cash outflow.
entries to prepare them for a new
accounting period

EXTERNAL USES OF CFS

 To assess the ability of a firm to manage ACCOUNTING PERIOD- Is a period of
cash flows time which is usually one year, generally starts
 To assess the ability of a firm to generate from January 1 and ends on December 31.
cash through its operations This is referred to as an accounting period that is
 To assess the company’s ability to meet a calendar year
its obligations and its dividend policy
 To provide information about the
effectiveness of the firm to convert its Cash and Receivables
revenues to cash
 To provide information to estimate or CASH - Cash is the resource on hand to meet
anticipate the company’s need for planned expenditures and emergency situations.
additional financing
CASH EQUIVALENTS- are short-term,
INTERNAL USES OF CFS ALONG SIDE
highly liquid investments that are readily
WITH CASH BUDGET CFS ARE USED: convertible into known amounts of cash and
near their maturity (90 days) when purchased.
 To assess liquidity
 Determine if short-term financing is
necessary
 To determine dividend policy
 Decide to distribute; or increase or
decrease
 To evaluate the investment and financing CASH MANAGEMENT (CONTROL
decisions OVER RECEIPTS)
STEPS IN THE ACCOUNTING CYCLE
  The person opening the mail or the sales
person using the cash register should
count the receipts immediately.
 All cash receipts are recorded daily in the
accounting records.
 All receipts are deposited daily in the
company’s bank account.

CASH MANAGEMENT (CONTROL

OVER PAYMENTS)
- Make all payments by check (except petty
cash items) so that a record exists for
every company expenditure.
- Authorize and sign all checks only after an
expenditure is verified and approved.
- Periodically reconcile the cash balance in
the bank statements with the company’s
accounting records.

PLEDGING - When a company pledges its

accounts receivable, it is using these accounts
as collateral for a loan, and the servicing
activities remain its responsibility.

NOTES RECEIVABLE
- A note receivable is an unconditional
written agreement to collect a certain sum
of money on a specific date.
- Notes receivable generally have two
attributes that are not found in
accounts receivable.

NOTES RECEIVABLE
1. They are negotiable instruments, which
means that they are legally and readily
transferable among parities and may be
used to satisfy debts by the holders of
these instruments.
2. They usually involve interest, requiring the
separation of the receivables into its
principal and interest components.