Advanced Accounting · AS 1 Disclosure of Accounting Policies

Fundamental Accounting Assumptions in AS 1: Going Concern, Consistency, Accrual

Updated 4 October 2026 · Fact-checked

AS 1 names three fundamental accounting assumptions: going concern, consistency and accrual. They are presumed to be followed, so no separate disclosure is needed. If any one is not followed, that fact must be disclosed. To answer a question, identify the assumption, check whether it was followed, and state the disclosure.

Understand Fundamental Accounting Assumptions: Going Concern, Consistency, Accrual

Accounting needs a few basic ideas that every preparer takes for granted. AS 1 calls the three most basic ones fundamental accounting assumptions. They are going concern, consistency and accrual.

Going concern: the enterprise is viewed as continuing in operation for the foreseeable future. It is assumed that it has neither the intention nor the need to liquidate or to curtail the scale of its operations materially. This is why assets are shown at cost less depreciation, and not at what they would fetch in a forced sale.

Consistency: accounting policies are assumed to be followed consistently from one period to the next. This lets you compare one year with another. A policy can be changed, but only as the standard permits, and the change must be disclosed.

Accrual: revenues and costs are recognised as they are earned or incurred, not as cash is received or paid. They are recorded in the books and reported in the financial statements of the periods to which they relate. Note that AS 1 describes accrual this way for revenue and costs. Do not limit it to expenses.

The key exam rule is this. These assumptions are presumed to be followed. If they are followed, nothing needs to be disclosed about them. If any one is not followed, the fact must be disclosed. Examiners often test this with a short scenario, so focus on the disclosure rule.

Key rules to remember

Going concern: Enterprise continues in operation for the foreseeable future → no intention or need to liquidate or curtail operations materially; Basis for carrying assets at cost less depreciation, not at break-up value.
Consistency: Same accounting policies from period to period; A change is allowed only as AS 1 permits, and must be disclosed.
Accrual: Revenue recognised when earned, costs when incurred, irrespective of cash receipt or payment; Items are recorded in the books and reported in the period they relate to.
Disclosure rule: Assumption followed → no disclosure needed; assumption not followed → fact must be disclosed; Core rule examiners test.

How to solve Fundamental Accounting Assumptions: Going Concern, Consistency, Accrual questions

Use this method for any scenario or theory question on the fundamental accounting assumptions.

1Read the facts and find what is happening: business closure, policy change, or cash versus due basis.
2Match it to the assumption: continuing business means going concern, policy across years means consistency, timing of recognition means accrual.
3State the assumption in one line with its meaning as per AS 1.
4Check whether the enterprise has followed it.
5If followed, say that no separate disclosure is required because it is presumed.
6If not followed, state that the fact must be disclosed, with reasons where relevant.
7Where numbers are given, correct the amount to the accrual basis and show the working.
8Write a one-line conclusion.

Quickest way: Match, test, disclose

When to use it: Use for MCQs and for short written answers when time is tight.

MCQ: spot the keyword. Continue operations means going concern. Same policy each year means consistency. Earned or incurred, not cash, means accrual.
Eliminate options that say disclosure is needed when the assumption is followed.
Eliminate options that say no disclosure is needed when it is not followed.
Written answer format: assumption, meaning, whether followed, disclosure, conclusion. Each part earns step marks.
For numerical adjustments, show the accrual working line by line before giving the final figure.

Common mistakes in Fundamental Accounting Assumptions: Going Concern, Consistency, Accrual

Saying disclosure is always required for the three assumptions.
Students remember the word disclosure but not the condition.
Fix: Write: disclosure is required only if an assumption is not followed. If followed, it is presumed.
Treating accrual as only expenses payable.
Outstanding expense adjustments are common in problems.
Fix: Remember accrual covers both revenue earned and costs incurred, whether or not cash has moved.
Saying consistency means a policy can never change.
The word consistency sounds absolute.
Fix: Say the policy can change as permitted by the standard, with disclosure, but must not change casually.
Confusing going concern with profitability.
Students link continuing with making profits.
Fix: Going concern is about the absence of intention or need to liquidate or curtail operations materially, not about earning a profit.
Mixing the fundamental assumptions with prudence, substance over form and materiality.
All are listed in the same standard.
Fix: Remember that those three are considerations in selecting policies. The fundamental assumptions are only going concern, consistency and accrual.

Worked examples

Example 1

A company's financial statements for the year do not follow the going concern assumption because the management has decided to wind up the business next year. Does AS 1 require any disclosure? Explain.

Show the solution

The going concern assumption is that the enterprise will continue in operation for the foreseeable future, with no intention to liquidate or curtail operations materially.
Here management intends to wind up, so the assumption is not followed.
Fundamental assumptions are presumed to be followed and need no disclosure when followed.
When one is not followed, AS 1 requires the fact to be disclosed.
So the company must disclose that the statements are not prepared on a going concern basis.

Answer: Yes. Since the going concern assumption is not followed, the fact must be disclosed in the financial statements.

Example 2

For the year ended 31 March, a firm recorded rent expense of ₹1,80,000, being cash paid. Rent of ₹20,000 for March was still unpaid and unrecorded. Also, rent of ₹15,000 paid in advance in this amount related to April of the next year. What rent expense follows the accrual assumption?

Show the solution

Accrual recognises costs in the period they are incurred, not when paid.
Cash paid is ₹1,80,000.
Add the unpaid March rent, which was incurred: ₹1,80,000 + ₹20,000 = ₹2,00,000.
Deduct the advance rent for next year, assuming it is included in the ₹1,80,000 paid: ₹2,00,000 − ₹15,000 = ₹1,85,000.

Answer: Rent expense on the accrual basis is ₹1,85,000. The ₹15,000 is a prepaid expense and ₹20,000 is outstanding rent.

Exam tips

Memorise the disclosure rule in one sentence. It is the most tested point.
In MCQs, check whether the scenario describes a followed or a not-followed assumption before choosing the disclosure option.
Define each assumption in the exact sense of AS 1. Keep each definition to one or two lines.
In accrual adjustments, state clearly which amount is outstanding and which is prepaid.
Keep this topic separate from the considerations in policy selection, because examiners test the difference.

Practice questions from AS 1 Disclosure of Accounting Policies

Fundamental Accounting Assumptions: Going Concern, Consistency, Accrual in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Fundamental Accounting Assumptions: Going Concern, Consistency, Accrual: frequently asked questions

What are the fundamental accounting assumptions in AS 1?

They are going concern, consistency and accrual. AS 1 presumes they are followed in preparing financial statements.

What happens if a fundamental accounting assumption is not followed?

The fact must be disclosed in the financial statements. If the assumptions are followed, no separate disclosure is needed.

Can an enterprise change its accounting policies if consistency is an assumption?

Yes, but only as permitted by the standard, and the change must be disclosed. Consistency means policies are not changed casually from year to year.

Is accrual the same as cash basis?

No. Under accrual, revenue and costs are recognised when earned or incurred, whether or not cash has been received or paid.