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Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

Accounting Concepts for CMA Foundation Explained Simply

Updated 10 October 2026 · Fact-checked

Accounting concepts are the basic assumptions on which books of account are kept. They include business entity, money measurement, going concern, accounting period, cost, dual aspect, matching, realisation and accrual. To solve a question, match the situation in the statement to the concept it describes, then eliminate options that describe a different one.

Understand Accounting Concepts

Accounting concepts are the ground rules of bookkeeping. Every accountant follows them, so every set of accounts means the same thing to everyone who reads it. Without them, two accountants could record the same transaction in two different ways.

Business entity concept: the business is treated as separate from its owner. If the owner puts in ₹5,00,000, the business owes that amount to the owner as capital. If the owner takes money for personal use, it is drawings, not a business expense.

Money measurement concept: only facts that can be expressed in money are recorded. A new machine costing ₹2,00,000 is recorded. The skill of your manager or the loyalty of your staff is not, because it has no exact money value.

Going concern concept: the business is assumed to continue for the foreseeable future. This is why a machine is shown at cost less depreciation and not at what it would fetch if sold today. Accounting period concept: the life of the business is cut into equal periods, usually one year, so profit can be measured and reported regularly.

Cost concept: an asset is recorded at the price actually paid to acquire it, and is not changed to match market value each year. Dual aspect concept: every transaction has two effects, a debit and a credit of equal amount. This gives the equation Assets = Liabilities + Capital.

Matching concept: expenses of a period are set against the revenue earned in that same period. Realisation concept: revenue is recognised when goods are sold or services given and the right to receive money arises, not when an order is placed. Accrual concept: income and expenses are recorded when they are earned or incurred, whether or not cash has moved. Accrual is the base; matching uses it to compute profit.

Key formulas to remember

Accounting equation (dual aspect)
Assets = Liabilities + Capital
Every transaction keeps both sides equal. Total debits always equal total credits.
Business entity
Owner's money put in = Capital (a liability of the business to the owner)
Drawings reduce capital. They are never a business expense.
Cost concept
Book value of asset = Cost − Depreciation
Market value is ignored in the books.
Matching concept
Profit = Revenue of the period − Expenses of the same period
Use outstanding and prepaid adjustments to bring expenses to the right period.
Accrual basis
Record when earned or incurred, not when cash is received or paid
This is the key difference from the cash basis.

How to solve Accounting Concepts questions

Most questions give a situation and ask which concept applies, or ask you to state a feature of a concept. Use this method.

  1. 1Read the situation and underline the key action, such as owner's personal expense, depreciation, unpaid salary or an unrecorded skill.
  2. 2Ask what is being recorded or not recorded, and why.
  3. 3Link the key action to a concept: separate owner means entity, no money value means money measurement, no plan to close means going concern.
  4. 4Check for timing words such as year, period, earned, due or received, which point to accounting period, matching, realisation or accrual.
  5. 5Check whether both sides of a transaction are mentioned, which points to dual aspect.
  6. 6Eliminate options that fit a convention or a different concept.
  7. 7Pick the option that matches the situation exactly and re-read the question once.

Quickest way: Keyword matching

When to use it: Use this for direct 'which concept is followed' questions when you have under a minute per question.

  1. Owner and business separate, or drawings: Business entity.
  2. Cannot be measured in rupees: Money measurement.
  3. Business will continue, or no intention to liquidate: Going concern.
  4. Yearly profit or Balance Sheet date: Accounting period.
  5. Recorded at purchase price: Cost.
  6. Debit equals credit, or Assets = Liabilities + Capital: Dual aspect.
  7. Expenses against the same period's revenue: Matching.
  8. Revenue when sold, not when ordered: Realisation.
  9. Earned or incurred, cash not needed: Accrual.

Common mistakes in Accounting Concepts

  • Treating owner's personal expenses paid from the business as business expenses.

    Students forget that the owner and the business are separate persons in accounts.

    Fix: Record them as drawings. They reduce capital and are not charged to the Profit and Loss Account.

  • Confusing matching and accrual concepts.

    Both deal with timing and both ignore cash movement.

    Fix: Remember accrual decides when an item is recorded, and matching sets expenses against the revenue they helped earn in the same period.

  • Saying assets are shown at market value.

    Students think the Balance Sheet shows what a thing is worth today.

    Fix: Under the cost concept assets are shown at cost less depreciation. Going concern supports this because assets are not meant to be sold.

  • Recording revenue when an order is received.

    An order feels like a sale.

    Fix: Under realisation, revenue arises when goods are delivered or services are done, and the right to payment is created.

  • Thinking money measurement means only cash transactions are recorded.

    The word money is read as cash.

    Fix: It means items that can be stated in rupees, including credit sales and unpaid expenses. Things like staff skill are left out.

  • Applying going concern to a business that is about to close.

    Students apply the concept mechanically.

    Fix: If closure is planned, assets are valued at what they will realise, and the going concern assumption no longer holds.

Worked examples

Example 1

Rohan runs a shop. He pays his son's school fees of ₹20,000 from the shop's cash. Which concept governs the treatment, and what is the treatment? (A) Cost concept, shop expense (B) Business entity concept, drawings (C) Matching concept, prepaid expense (D) Going concern concept, capital

Show the solution
  1. The payment is for the owner's family, not for the business.
  2. The owner and the business are treated as separate, so the payment is a withdrawal by the owner.
  3. This is the business entity concept.
  4. Such a withdrawal is called drawings and reduces capital.
  5. Options A, C and D name the wrong concept or the wrong treatment.

Answer: (B) Business entity concept, drawings

Example 2

Meera Traders paid an insurance premium of ₹12,000 on 1 October 2026 for one year ending 30 September 2027. The books close on 31 March 2027. How much is charged to the year ending 31 March 2027, and which concept supports it? (A) ₹12,000, cost concept (B) ₹6,000, matching concept (C) ₹3,000, going concern (D) ₹9,000, realisation

Show the solution
  1. The policy covers 12 months, so the cost per month is ₹12,000 ÷ 12 = ₹1,000.
  2. From 1 October 2026 to 31 March 2027 is 6 months.
  3. Expense for the year = 6 × ₹1,000 = ₹6,000.
  4. The remaining ₹6,000 is a prepaid expense carried to the next year.
  5. Charging only the part that belongs to the period follows the matching concept, on an accrual basis.

Answer: (B) ₹6,000, matching concept

Exam tips

  • Learn the one-line trigger for each of the nine concepts. Most questions test recognition of the trigger.
  • Where matching and accrual both appear as options, pick matching if the question speaks of setting expenses against revenue, and accrual if it speaks of recording without cash.
  • Questions on drawings, capital introduced and personal expenses almost always point to business entity.
  • Watch for the words 'foreseeable future' or 'not to be closed', which point to going concern.
  • There is no negative marking, so answer every question even if you must guess after eliminating two options.

Practice questions from Accounting Principles, Concepts and Conventions

Accounting Concepts in other exams

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

Accounting Concepts: frequently asked questions

What is the difference between matching concept and accrual concept?

Accrual says income and expenses are recorded when they are earned or incurred, not when cash moves. Matching says the expenses of a period must be set against the revenue of that same period to find profit. Accrual is the basis and matching is its use in measuring profit.

Can you give an example of the business entity concept?

Suppose an owner takes ₹10,000 from the business to pay a personal electricity bill. In the books this is drawings, a withdrawal of capital. It is not an expense of the business because the owner and the business are separate.

Why is going concern important in accounting?

It allows assets to be recorded at cost less depreciation and spread over their useful life. If the business were expected to close soon, assets would have to be shown at their sale value instead.

Is dual aspect the same as double entry?

Dual aspect is the concept that every transaction has two equal effects. Double entry is the system of bookkeeping that follows from it, by debiting one account and crediting another for the same amount.