Accounting · Theoretical Framework

Accounting Concepts, Principles and Conventions for CA Foundation

Updated 1 October 2026 · Fact-checked

Accounting concepts, principles and conventions are the basic rules and assumptions that guide how transactions are recorded and reported. Concepts like going concern, accrual and business entity are core assumptions. Conventions like prudence, materiality and consistency guide judgement. To solve questions, name the concept, state its meaning, and link it to the facts given.

Understand Accounting Concepts, Principles and Conventions

Accounting needs common ground rules. Without them, two accountants could report very different profits for the same business. Concepts, principles and conventions are these ground rules. They make financial statements reliable and comparable.

Concepts are the basic assumptions on which accounting rests. Examples: business entity (the business is separate from its owner), going concern (the business will continue for the foreseeable future), money measurement (only items that can be expressed in money are recorded), accounting period (profit is measured for a fixed period, usually a year), cost concept (assets are recorded at cost), dual aspect (every transaction has two effects), accrual (record income and expenses when they arise, not when cash moves), and matching (match expenses with the revenue they helped earn in the same period).

Conventions are customs that guide how accountants use judgement. The main ones are prudence or conservatism (provide for expected losses, do not anticipate profits), materiality (report items that are significant enough to influence decisions; ignore trivial ones), consistency (follow the same methods from year to year), and full disclosure.

The terms are not used identically everywhere. Many books treat concepts and principles as nearly the same, and conventions as the judgement-based practices. Under Indian GAAP, Accounting Standard 1 names three fundamental assumptions: going concern, consistency and accrual. It also says prudence, substance over form and materiality should govern the selection and application of policies. Learn this list well, as it is often tested.

A simple way to remember the difference: concepts tell you what the basic assumptions are, conventions tell you how to behave when judgement is needed.

Key rules to remember

Business entity: Business and owner are separate persons for accounting; Owner's capital is a liability of the business to the owner. Personal expenses paid from business are drawings.
Going concern: Assume the business will continue; assets are shown at cost less depreciation, not at break-up value; If liquidation is expected, this assumption no longer applies.
Accrual: Revenue and expenses are recognised when earned or incurred, not when cash is received or paid; Gives rise to outstanding and prepaid expenses, accrued and unearned income.
Matching: Expenses of a period = costs incurred to earn that period's revenue; Closing stock is carried forward because its cost relates to next period's sales.
Prudence: Provide for all probable losses; do not recognise unrealised gains; Example: stock at lower of cost and net realisable value.
Materiality: Disclose items whose omission or error could influence users' decisions; Depends on amount and nature. It is not a fixed percentage.
Consistency: Same accounting policies from period to period, unless a change is required by law, a standard or gives a fairer view; Changes must be disclosed.
AS 1 fundamental assumptions: Going concern, Consistency, Accrual; If followed, no disclosure is needed. If not followed, the fact must be disclosed.

How to solve Accounting Concepts, Principles and Conventions questions

Use this method for both theory questions and short scenario questions on concepts.

1Read the question and decide the type: define, differentiate, identify the concept from a case, or apply it to a figure.
2Write the exact name of the concept or convention first.
3Give a one-line meaning in your own words.
4State whether it is a concept (assumption) or a convention (judgement guide) if the question asks for classification.
5Apply it to the facts given. Use the figures and name the effect on profit, assets or liabilities.
6Give a short example if the question allows one, or the question says 'explain with example'.
7Close with the conclusion or the correct treatment in one line.

Quickest way: Keyword-and-example method

When to use it: For 'identify the concept' questions and short notes when time is tight.

Spot the trigger words. 'Separate from owner' means entity. 'Will continue' means going concern. 'Due but not paid' means accrual. 'Same period' means matching. 'Expected loss' means prudence. 'Insignificant amount' means materiality. 'Same method every year' means consistency.
Write name, meaning, example in three short lines.
For differences, use two or three clear points such as nature, basis and effect.
In numerical cases, show the one-line calculation and the concept name beside it.

Common mistakes in Accounting Concepts, Principles and Conventions

Mixing up accrual and matching.
Both deal with timing of expenses and income.
Fix: Accrual decides when to record an item. Matching decides which period's revenue an expense belongs to. Say both in one line.
Saying prudence allows creating hidden reserves or understating profit deliberately.
Students read conservatism as 'be pessimistic'.
Fix: Prudence means reasonable caution for real uncertainty. Deliberate understatement is not prudence.
Treating materiality as a fixed percentage of sales.
Students want a simple rule.
Fix: Say materiality depends on the size and nature of the item and its effect on decisions.
Applying going concern when the business is about to close.
Students apply the rule mechanically.
Fix: State that if closure is expected, assets are valued at likely realisable value and the assumption is dropped.
Saying consistency means a method can never change.
The word suggests rigidity.
Fix: Write that a change is allowed if required by law or standard, or if it gives a more appropriate presentation, and the change must be disclosed.
Classifying business entity as a convention or prudence as a concept without reasoning.
Books label them differently.
Fix: Follow the usual grouping: entity, going concern, accrual, matching, cost are concepts; prudence, materiality, consistency are conventions. Add a one-line reason.

Worked examples

Example 1

State the accounting concept or convention followed in each case: (a) Mr. Rao paid ₹5,000 of his son's school fees from the business bank account and debited it to drawings. (b) A firm values closing stock costing ₹40,000 at ₹35,000 because its market selling price less selling costs is ₹35,000. (c) Rent for March, ₹10,000, is paid in April and still charged to the year ending 31 March.

Show the solution

(a) The owner and the business are separate. Personal expense is not a business expense, so it goes to drawings. This is the business entity concept.
(b) Stock is valued at the lower of cost (₹40,000) and net realisable value (₹35,000). The expected loss of ₹5,000 is recognised now. This is the prudence convention.
(c) The rent belongs to March because the use of the premises was in that year, even though cash is paid later. It is shown as outstanding rent. This is the accrual concept, and also matching since the expense goes with that year's revenue.

Answer: (a) Business entity concept. (b) Prudence (conservatism). (c) Accrual concept, supported by matching.

Example 2

Distinguish between going concern concept and accrual concept, with one example each.

Show the solution

Meaning: Going concern assumes the business will run for the foreseeable future with no intention or need to liquidate. Accrual means recording revenue and expenses when they are earned or incurred, regardless of cash movement.
Purpose: Going concern justifies recording assets at cost less depreciation and spreading cost over their useful life. Accrual ensures profit for the period reflects all income earned and expenses incurred in that period.
Effect: Going concern affects how assets and liabilities are valued. Accrual affects the timing of recognising income and expenses.
Example of going concern: A machine costing ₹2,00,000 with a 10-year life is depreciated each year, not written off in year one.
Example of accrual: Salary of ₹30,000 for March is paid in April. It is charged to the March year as outstanding salary.
Status: Both are fundamental assumptions under AS 1.

Answer: Going concern concerns the continuity of the business and the basis of valuing assets. Accrual concerns the timing of recognising income and expenses. Both are fundamental assumptions under AS 1, and they work together in preparing financial statements.

Exam tips

For 'identify the concept' questions, write the name first, then the reason from the facts. Marks usually follow the reason.
Learn the AS 1 list (going concern, consistency, accrual) and the three governing considerations (prudence, substance over form, materiality) as separate lists.
In differentiate-between answers, give at least three points and one example. Use a two-column layout if the question allows.
Use the exact words 'unrealised gains' and 'probable losses' when writing about prudence.
For MCQ-style objective checks, watch for options that sound similar. Match the trigger word to the concept before you choose.

Practice questions from Theoretical Framework

Accounting Concepts, Principles and Conventions: frequently asked questions

What is the difference between accounting concepts and conventions?

Concepts are basic assumptions on which accounting is built, such as entity, going concern and accrual. Conventions are customs that guide judgement, such as prudence, materiality and consistency. Concepts are the foundation, conventions help you apply them.

What are the fundamental accounting assumptions under AS 1?

AS 1 names three: going concern, consistency and accrual. If they are followed, no separate disclosure is needed. If any is not followed, that fact must be disclosed.

How are matching and prudence different?

Matching links expenses to the revenue they helped earn in the same period. Prudence says to provide for probable losses and not recognise unrealised gains. Matching is about alignment of periods, prudence is about caution under uncertainty.

Does materiality mean small items can be ignored completely?

Small items may be combined or expensed immediately if they would not influence decisions. But an item can be material because of its nature, not just its amount. So there is no fixed cut-off.