Financial Accounting · Disclosure of Accounting Policies (AS 1)

Fundamental Accounting Assumptions under AS 1

Updated 10 October 2026 · Fact-checked

Under AS 1, the fundamental accounting assumptions are going concern, consistency and accrual. They are assumed to be followed in financial statements, so no separate disclosure is needed. If any one is not followed, the fact must be disclosed. To answer a question, identify the assumption, test whether it holds, then state the disclosure.

Understand Fundamental Accounting Assumptions

Every set of financial statements rests on a few basic ideas that the accountant takes for granted. AS 1 (Disclosure of Accounting Policies) calls three of them fundamental accounting assumptions: going concern, consistency and accrual.

Going concern means the enterprise is assumed to continue in operation for the foreseeable future. It will neither be wound up nor cut its scale of operations materially. This is why assets are carried on the basis of their use in the business and not at what they would fetch in a forced sale. It is also why prepaid expenses can sit in the balance sheet as assets.

Consistency means accounting policies are assumed to be followed from one period to the next. A business that charges depreciation by the straight-line method this year should not switch to the written down value method next year without a good reason. Consistent policies make results of different years comparable.

Accrual means revenues and costs are recognised as they are earned or incurred, not when money is received or paid. They are recorded in the accounting records and reported in the financial statements of the periods to which they relate. Rent due but unpaid is an expense of this year. Interest earned but not yet received is income of this year.

The key rule is about disclosure. Because these three are presumed to be followed, nobody has to state that they were followed. But if a fundamental assumption is not followed, the fact must be disclosed. A common exam question asks what the accountant should do when, for example, the books are prepared on a cash basis or the business is about to close down.

Do not confuse the three assumptions with accounting policies. Policies are the specific methods chosen, such as FIFO or straight-line depreciation. The assumptions are the background on which those choices are made.

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-based values and for deferring prepaid items.
Consistency: Same accounting policies followed from period to period; A change is allowed only as per AS 1 conditions (required by statute, by an accounting standard, or for a more appropriate presentation), and its effect must be disclosed.
Accrual: Revenue and costs recognised when earned or incurred, not when cash is received or paid; Applies to both income and expenses and is recorded in the period to which they relate.
Disclosure rule: Assumption followed → no disclosure needed; assumption not followed → disclose the fact; This is the single most tested line of this topic.

How to solve Fundamental Accounting Assumptions questions

Use this method for any theory or case-based question on fundamental accounting assumptions.

1Read the facts and list what the business is doing: ongoing or closing, same or changed method, cash or accrual basis.
2Match each fact to one of the three assumptions: going concern, consistency or accrual.
3State the assumption in one line, with its meaning in plain words.
4Decide whether the assumption is being followed in the case given.
5If followed, say that no separate disclosure is required because it is presumed.
6If not followed, say that the fact must be disclosed in the financial statements, and add the effect on the numbers where the question gives figures.
7Give a one-line conclusion that answers exactly what was asked.

Quickest way: Three-word test: Continue, Same, Earned

When to use it: Use for MCQs and short case questions where you must name the assumption or decide on disclosure.

Continue? Business will keep running: going concern.
Same? Policy unchanged from last period: consistency.
Earned? Income or expense booked when it arises, not when cash moves: accrual.
Then ask: is it followed? If yes, no disclosure. If no, disclose.

Common mistakes in Fundamental Accounting Assumptions

Saying disclosure is needed even when all three assumptions are followed.
Students assume that anything in AS 1 must be disclosed.
Fix: Remember that followed assumptions are presumed and need no disclosure. Only non-compliance is disclosed.
Treating consistency as meaning a policy can never change.
The word suggests rigidity.
Fix: A change is allowed if required by law, by an accounting standard, or for more appropriate presentation, and the change must be disclosed.
Confusing accrual with the cash basis.
Cash received feels like income.
Fix: Under accrual, income and expense belong to the period they relate to, whatever the cash timing.
Mixing up going concern with consistency in a 'difference between' answer.
Both sound like continuity.
Fix: Going concern concerns the life of the enterprise. Consistency concerns the sameness of policies across periods.
Calling the assumptions accounting policies, or listing prudence and substance over form as fundamental assumptions.
AS 1 discusses all of these together.
Fix: Only three are fundamental assumptions. Prudence, substance over form and materiality are considerations in selecting policies.

Worked examples

Example 1

Sundaram Traders has decided to close its business next month and sell all assets. Its accountant still prepares the annual accounts showing fixed assets at cost less depreciation. Which fundamental accounting assumption is affected and what should be done?

Show the solution

The business will not continue in operation, so the going concern assumption is not valid.
Preparing accounts on a going-concern basis is therefore inappropriate.
Since a fundamental assumption is not followed, the fact must be disclosed.
Assets should be shown on the basis that suits a closure, not on a continuing-use basis, and the basis adopted must be stated.

Answer: Going concern is not followed. The financial statements must disclose this fact and the basis actually used.

Example 2

Meera Ltd paid ₹60,000 on 1 March for insurance covering 1 March to 28 February of the next year. Its year ends on 31 March. Explain how the accrual assumption applies and how much is charged to this year's profit and loss.

Show the solution

Total premium paid is ₹60,000 for 12 months, so the monthly cost is ₹60,000 ÷ 12 = ₹5,000.
Cover used in this year is 1 March to 31 March, which is 1 month.
Expense for this year = ₹5,000 × 1 = ₹5,000.
Balance for the remaining 11 months = ₹5,000 × 11 = ₹55,000, shown as prepaid insurance, an asset.
Accrual recognises the cost in the period it relates to, not when it was paid.

Answer: ₹5,000 is charged to this year's profit and loss; ₹55,000 is carried forward as prepaid insurance.

Exam tips

Write the disclosure rule in every answer: followed means no disclosure, not followed means disclose.
In 'differentiate' questions, use two or three clear points such as meaning, what it affects and example.
For MCQs, spot keywords: 'foreseeable future' is going concern, 'period to period' is consistency, 'earned or incurred' is accrual.
Link accrual to a small numerical, such as prepaid or outstanding expenses, to show application.
Do not list more than three fundamental assumptions.

Practice questions from Disclosure of Accounting Policies (AS 1)

Fundamental Accounting Assumptions 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: frequently asked questions

What are the fundamental accounting assumptions under AS 1?

They are going concern, consistency and accrual. They are presumed to be followed in preparing financial statements.

What happens if fundamental accounting assumptions are not followed?

The fact must be disclosed in the financial statements. If they are followed, no disclosure is required.

What is the difference between going concern and consistency?

Going concern assumes the business will continue for the foreseeable future. Consistency assumes the same accounting policies are used from one period to the next.

Is accrual the same as the cash basis?

No. Accrual records income and expenses when they are earned or incurred, while the cash basis records them only when cash is received or paid.