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Financial Accounting · Accounting Fundamentals

Accounting Concepts, Principles and Conventions for CMA Inter

Updated 10 October 2026 · Fact-checked

Accounting concepts are the basic assumptions and rules that guide how transactions are recorded, such as going concern, accrual, entity and money measurement. Conventions are customary practices like consistency, prudence and materiality. To solve questions, identify the situation, name the concept, state its rule and apply it with figures.

Understand Accounting Concepts, Principles and Conventions

Accounting is a language. For two people to read the same accounts and reach the same meaning, everyone must follow common ground rules. These ground rules are the accounting concepts, principles and conventions.

Concepts (also called assumptions) are the basic ideas on which recording rests. Examples: business entity (the business is separate from its owner), money measurement (only items expressible in money are recorded), going concern (the business will continue for the foreseeable future), accrual (income and expenses are recorded when earned or incurred, not when cash moves), cost (assets are recorded at the price paid) and dual aspect (every transaction has two equal effects).

Conventions are customs that accountants follow to make statements useful and comparable. The main ones are consistency (use the same methods year after year), prudence or conservatism (provide for expected losses, do not anticipate profits), materiality (disclose items that could influence a user's decision; ignore trivial ones) and full disclosure. Matching says expenses of a period are set against the revenues they helped earn in that same period.

The accounting equation is the dual aspect in numbers: Assets = Capital + Liabilities. Every transaction changes the equation but keeps both sides equal. This is why the balance sheet always balances.

In the CMA syllabus, AS 1 treats going concern, consistency and accrual as the fundamental accounting assumptions. If followed, no separate disclosure is needed. If any is not followed, the fact must be disclosed. Prudence, substance over form and materiality are the considerations in selecting accounting policies.

Note on consistency: in general accounting theory, consistency is treated as a convention. AS 1, however, classes it as a fundamental accounting assumption. In an AS 1 answer, call it a fundamental assumption. In a general concepts-versus-conventions answer, you may mention both views.

Going concern vs accrual: going concern is about time (the business will not be wound up soon, so fixed assets are shown at cost less depreciation, not at break-up value). Accrual is about recognition (record the item when it arises, not when cash is paid or received).

Key rules to remember

Accounting equation
Assets = Capital + Liabilities
Capital is the owner's equity. It also gives Capital = Assets − Liabilities.
Expanded equation
Assets = Opening Capital + Additional Capital + Profit − Drawings + Liabilities
Use it when profit or drawings occur during the period.
Profit from capital change
Profit = Closing Capital − Opening Capital + Drawings − Additional Capital
Used in the statement of affairs method.
AS 1 fundamental assumptions
Going concern, Consistency, Accrual
Assumed to be followed. Disclose only if not followed. Consistency is a convention in general theory, but AS 1 classes it as a fundamental assumption.
Prudence rule
Provide for all expected losses; do not recognise expected profits
Example: stock valued at lower of cost and net realisable value.
Matching rule
Expenses of the period are matched with revenue of the same period
Leads to outstanding and prepaid expense adjustments.

How to solve Accounting Concepts, Principles and Conventions questions

Theory questions on this topic reward a clear definition, a rule and a practical illustration. Numerical questions are mostly accounting equation or identification of the concept.

  1. 1Read the question and mark whether it asks to define, distinguish, identify or compute.
  2. 2For identification, find the key words: cash not yet received means accrual, separate from owner means entity, same method as last year means consistency.
  3. 3Name the concept or convention in the first line of your answer.
  4. 4State the rule in one or two plain sentences.
  5. 5Give a short rupee illustration to show you can apply it.
  6. 6For the accounting equation, write the opening position, then show the effect of each transaction on assets, liabilities and capital.
  7. 7Check that Assets = Capital + Liabilities after every transaction.
  8. 8For distinctions, give at least four points in two columns of ideas: basis, nature, flexibility, example.

Quickest way: Keyword-to-concept mapping

When to use it: For MCQs asking which concept applies to a given situation.

  1. Underline the trigger word in the statement.
  2. Owner's personal expense kept out of business books: business entity.
  3. Asset shown at purchase price, not market value: cost concept.
  4. Fixed assets not shown at sale value: going concern.
  5. Expense recorded though unpaid: accrual and matching.
  6. Provision for doubtful debts or lower of cost and NRV: prudence.
  7. Change of method disclosed: consistency.
  8. Small item charged fully to expense: materiality.
  9. For equation MCQs, solve for the missing term using Assets = Capital + Liabilities.

Common mistakes in Accounting Concepts, Principles and Conventions

  • Treating concepts and conventions as the same thing.

    Textbooks often use the terms loosely together.

    Fix: Concepts are basic assumptions that underlie recording. Conventions are customs for reporting and policy choice. Say this in distinction answers.

  • Confusing going concern with accrual.

    Both relate to the passage of time.

    Fix: Going concern is about continuity of the business. Accrual is about when to record income and expense. Link each to its effect.

  • Saying consistency means methods can never change.

    The word suggests rigidity.

    Fix: Methods may change if required by law, a standard, or if the change gives a better presentation. The effect must be disclosed.

  • Applying prudence to create hidden reserves.

    Students read it as always being pessimistic.

    Fix: Prudence means reasonable caution, not deliberate understatement of profit or overstatement of losses.

  • Showing drawings as an expense in the accounting equation.

    Money leaves the business, so it feels like a cost.

    Fix: Drawings reduce capital directly. They are not charged to profit.

  • Ignoring that equation sides must stay equal after each transaction.

    Students rush and update only one side.

    Fix: Every transaction has two effects. Tick both before moving on.

Worked examples

Example 1

Show the effect of the following on the accounting equation: (a) Rahul starts business with cash ₹5,00,000. (b) Buys goods on credit for ₹1,00,000. (c) Sells goods costing ₹60,000 for ₹90,000 cash. (d) Withdraws ₹10,000 cash for personal use.

Show the solution
  1. (a) Assets (cash) ₹5,00,000 = Capital ₹5,00,000 + Liabilities nil.
  2. (b) Stock rises by ₹1,00,000 and creditors rise by ₹1,00,000. Assets ₹6,00,000 = Capital ₹5,00,000 + Liabilities ₹1,00,000.
  3. (c) Stock falls by ₹60,000 and cash rises by ₹90,000, so profit of ₹30,000 is added to capital. Cash ₹5,90,000 + stock ₹40,000 = ₹6,30,000 = Capital ₹5,30,000 + Liabilities ₹1,00,000.
  4. (d) Cash falls by ₹10,000 and capital falls by ₹10,000 as drawings. Assets ₹6,20,000 = Capital ₹5,20,000 + Liabilities ₹1,00,000.
  5. Check: assets are cash ₹5,00,000 + 90,000 − 10,000 = ₹5,80,000 plus stock ₹40,000 = ₹6,20,000. Matches.

Answer: Closing position: Assets ₹6,20,000 = Capital ₹5,20,000 + Liabilities ₹1,00,000. Profit is ₹30,000 and drawings are ₹10,000.

Example 2

Distinguish between going concern concept and accrual concept. Also state which concept is applied when rent of ₹12,000 for March is paid in April.

Show the solution
  1. Going concern: assumes the business continues for the foreseeable future. Accrual: income and expenses are recognised when earned or incurred, not when cash is received or paid.
  2. Basis: going concern deals with the life of the business. Accrual deals with timing of recognition.
  3. Effect: going concern justifies showing fixed assets at cost less depreciation and not at break-up value. Accrual leads to outstanding, prepaid and accrued items.
  4. If going concern fails, assets are valued at realisable values. If accrual is not followed, cash basis is used and the fact must be disclosed.
  5. Rent: the service was used in March, so the expense belongs to March. The accrual concept (with matching) applies: charge ₹12,000 to March and show it as outstanding expense, a liability, at 31 March, even though it is paid in April.

Answer: Going concern concerns continuity of the business; accrual concerns the timing of recognising items. For the March rent, the accrual concept (with matching) applies: ₹12,000 is charged to March and shown as an outstanding expense (a liability) at 31 March, even though it is paid in April.

Exam tips

  • Write definition, rule and example for each concept. Three short lines earn more than one long paragraph.
  • For 'distinguish' questions, give four or five points in a clear comparison layout.
  • Quote AS 1 correctly: going concern, consistency and accrual are the fundamental assumptions.
  • In equation problems, show a running table so you earn step marks even if one figure is wrong.
  • In MCQs there is no negative marking, so attempt every question after eliminating options.

Practice questions from Accounting Fundamentals

Accounting Concepts, Principles and Conventions 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, 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 customary practices like consistency, prudence and materiality that guide how statements are prepared. Concepts are fundamental; conventions are practical guidelines.

Which are the fundamental accounting assumptions under AS 1?

They are going concern, consistency and accrual. They are presumed to be followed, so no disclosure is needed. If one is not followed, the fact must be disclosed.

What is the accounting equation with an example?

Assets = Capital + Liabilities. If you start a business with ₹2,00,000 cash and buy goods on credit for ₹50,000, assets are ₹2,50,000, capital is ₹2,00,000 and liabilities are ₹50,000.

Is prudence the same as conservatism?

They are used to mean the same idea: provide for expected losses but do not recognise expected gains. It requires reasonable caution, not deliberate understatement of profits.