Unit 1: Accounting fundamentals
Accounting for Management and Reporting notes · PTU syllabus (MBA 104-18)
On this page
Unit summary
Accounting is the information system that measures and communicates economic activity. This unit covers accounting as an information system, the accounting process, concepts, conventions and principles, the role of the accountant, the branches of accounting — financial, cost and management — and their interrelationships, and the prescribed formats of financial statements for companies, banks and insurers.
After this unit you can
- Explain accounting as an information system and the accounting process
- Explain accounting concepts, conventions and principles
- Explain the role of the accountant and branches of accounting
- Describe the formats of financial statements for companies, banks and insurers
PTU syllabus topics
- Accounting as an information system
- the accounting process
- concepts/conventions/principles
- role of the accountant
- branches of accounting (financial, cost, management) and their inter-relationships
- Schedule VI formats for public limited
- banking and insurance companies
Financial accounting
Records and reports to outsiders
Cost accounting
Ascertains and controls cost
Management accounting
Information for decisions
Topic 1
Accounting as an information system
- 1
Business events (input)
- 2
Recording
Journal, vouchers, ERP entries
- 3
Classifying
Ledger accounts
- 4
Summarising
Trial balance, financial statements
- 5
Analysing and interpreting
Ratios, trends
- 6
Communicating
Reports to users (output)
- 7
Feedback
Decisions and control
- Users: internal (management, employees) and external (investors, lenders, suppliers, customers, government, regulators, public).
- Qualities of accounting information: relevance, faithful representation, comparability, verifiability, timeliness, understandability.
Topic 2
The accounting process
Accounting is the art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events which are of a financial character, and interpreting the results (AICPA).
- 1. Identify transactions:
- 2. Journalise: Record in the journal
- 3. Post to ledger:
- 4. Prepare trial balance:
- 5. Pass adjusting entries:
- 6. Prepare final accounts:
- 7. Close the books:
Rules of debit and credit
| Type of account | Debit | Credit |
|---|---|---|
| Personal | The receiver | The giver |
| Real | What comes in | What goes out |
| Nominal | All expenses and losses | All incomes and gains |
Modern (accounting equation) approach: Assets = Liabilities + Capital; increase in assets and expenses is debited; increase in liabilities, capital and income is credited.
Topic 3
Concepts, conventions and principles
GAAP are the common set of rules, concepts and conventions used for preparing financial statements so that they are consistent and comparable.
Business entity
Business is separate from the owner
Money measurement
Only transactions measurable in money are recorded
Going concern
Business will continue indefinitely
Accounting period
Life divided into periods (usually one year)
Cost concept
Assets recorded at cost
Dual aspect
Every transaction has two effects
Matching
Expenses matched with revenues of the period
Accrual
Recorded when earned or incurred, not when cash moves
Realisation
Revenue recognised when earned
Conventions
Consistency, full disclosure, conservatism (prudence), materiality
- In India, Accounting Standards (AS) issued by ICAI and Ind AS (converged with IFRS) for specified companies give GAAP a formal shape.
Topic 4
Role of the accountant
- Traditional: record keeping, preparing financial statements, tax compliance, audit support.
- Modern: business partner and adviser — budgeting and forecasting, cost management, performance measurement, decision support, risk management and internal control, ESG reporting, data analytics, fraud prevention, strategic planning (CFO role).
Topic 5
Branches of accounting and their interrelationship
| Basis | Financial accounting | Cost accounting | Management accounting |
|---|---|---|---|
| Purpose | Report position and performance to outsiders | Ascertain and control cost | Help management plan and decide |
| Users | External — shareholders, lenders, tax | Internal | Internal |
| Compulsion | Statutory | Required for specified industries | Voluntary |
| Time focus | Past | Past and present | Future |
| Rules | GAAP, standards | Cost accounting standards (CAS) | No fixed rules |
- Interrelationship: financial accounting provides historical data; cost accounting analyses it by products and processes; management accounting uses both (plus non-financial data) for planning and decisions — all share one database in an integrated ERP.
Topic 6
Formats of financial statements: companies, banks and insurers
- Companies: the syllabus refers to Schedule VI of the Companies Act, 1956 — replaced by Schedule III of the Companies Act, 2013 (Division I for AS companies, Division II for Ind AS companies, Division III for NBFCs): vertical balance sheet (equity and liabilities; assets) and statement of profit and loss with notes.
- Banking companies: Third Schedule of the Banking Regulation Act — Form A (balance sheet with 12 schedules: capital, reserves, deposits, borrowings, other liabilities, cash and RBI balances, bank balances, investments, advances, fixed assets, other assets, contingent liabilities) and Form B (profit and loss with schedules for interest earned, other income, interest expended, operating expenses).
- Insurance companies: IRDAI regulations — Revenue Account (policyholders' — Form A-RA/B-RA), Profit and Loss Account (shareholders' — A-PL/B-PL), Balance Sheet (A-BS/B-BS), receipts and payments account.
Exam tip
Mention that Schedule VI has been replaced by Schedule III — answers using the current law earn credit.
Key terms
- Accounting information system
- System capturing, processing and reporting financial data
- Accounting conventions
- Customary practices — consistency, conservatism, materiality, disclosure
- Management accounting
- Accounting for internal planning, control and decisions
- Schedule III
- Format of company financial statements under the Companies Act, 2013
- Form A and Form B
- Formats of bank balance sheet and P&L under the BR Act
Quick revision
- AIS: input → recording → classifying → summarising → reporting → feedback.
- Accounting cycle; concepts (entity, going concern, accrual, matching) and conventions.
- Accountant's role: from book-keeper to business partner.
- Financial, cost, management accounting interrelated.
- Formats: Schedule III (companies), Forms A/B (banks), IRDAI forms (insurers).
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Why is accounting called an information system?
- Q2.State the steps of the accounting process.
- Q3.What is the going concern concept?
- Q4.Distinguish financial and management accounting.
- Q5.What replaced Schedule VI?
- Q6.What are Form A and Form B for banks?
Long-answer questions
- Q1.Explain accounting as an information system and the accounting process.
- Q2.Explain accounting concepts, conventions and principles.
- Q3.Explain the branches of accounting and their interrelationship.
- Q4.Explain the formats of financial statements for companies, banks and insurance companies.
Stuck on this unit?
Message SBS on WhatsApp for help with Accounting for Management and Reporting, or to ask about studying MBA at Synetic.