Corporate Accounting and Financial Management · Introduction to Accounting

Accounting Concepts, Principles and Conventions Explained for CS Executive

Updated 11 October 2026 · Fact-checked

Accounting concepts, principles and conventions are the ground rules that decide how transactions are recorded and reported. Concepts are basic assumptions, such as going concern and accrual. Conventions are customary practices, such as prudence and consistency. To answer a question, name the rule, state its meaning, apply it to the facts, and conclude.

Understand Accounting Concepts, Principles and Conventions

Accounting needs common rules. Without them, two accountants could report different profits for the same business, and nobody could compare or trust the figures. Concepts, principles and conventions are those common rules.

Concepts are the basic assumptions on which accounting is built. The main ones are the business entity concept (the business is separate from its owner), money measurement (only items measurable in money are recorded), going concern (the business will continue for the foreseeable future), accrual (income and expenses are recorded when they are earned or incurred, not when cash moves), accounting period and historical cost.

Principles are rules that follow from the concepts. The matching principle says you charge the expenses of a period against the revenue they helped earn in that same period. The revenue recognition principle says revenue is recorded when it is earned, not when cash is received. The dual aspect principle says every transaction has two equal effects.

Conventions are practices accepted over time to deal with doubt. Prudence (conservatism) says: provide for all expected losses, but do not anticipate profits. Consistency says: use the same methods from year to year, so results can be compared. Materiality says: report items that could influence a user's decision, and treat trivial items in the simplest way. Full disclosure says: show everything that matters.

AS 1 (Disclosure of Accounting Policies) treats three as fundamental accounting assumptions: going concern, consistency and accrual. If they are followed, no separate disclosure is needed. If any is not followed, the fact must be disclosed. AS 1 also says that prudence, substance over form and materiality should govern the selection and application of accounting policies.

Key rules to remember

Fundamental accounting assumptions (AS 1): Going concern + Consistency + Accrual; Assumed to be followed. Disclose only if any one is not followed.
Considerations governing accounting policies (AS 1): Prudence + Substance over form + Materiality; Used when choosing and applying accounting policies.
Accounting equation (dual aspect): Assets = Capital + Liabilities; Every transaction keeps this equation balanced.
Matching principle: Profit for the period = Revenue earned − Expenses incurred to earn it; Based on accrual, not on cash received or paid.
Prudence rule: Provide for expected losses; do not record expected gains; Do not misuse it to create hidden reserves.
Inventory valuation (prudence in practice): Closing stock = Lower of cost and net realisable value; A standard application of prudence.

How to solve Accounting Concepts, Principles and Conventions questions

Use this method for theory questions, short notes and case-based questions on concepts and conventions.

1Read the question and identify whether it asks you to define, differentiate, or apply a rule to facts.
2Name the exact concept, principle or convention involved.
3Define it in one or two plain sentences. Say whether it is a concept, principle or convention.
4Link it to AS 1 if it is going concern, consistency, accrual, prudence, materiality or substance over form.
5For application questions, state the facts, then show what the rule requires and the resulting entry or figure.
6Add one short example with a rupee figure to prove understanding.
7End with a clear conclusion that answers the exact question asked.

Quickest way: Rule-Fact-Result in three lines

When to use it: Use when time is short, especially for 4 to 5 mark short notes or one-line application questions.

Line 1: Define the rule in one sentence and label it as a concept or convention.
Line 2: Give a one-line rupee example showing the rule at work.
Line 3: State the effect on profit or the balance sheet, or its AS 1 status.

Common mistakes in Accounting Concepts, Principles and Conventions

Mixing up accrual with cash basis, for example recording rent only when paid.
Students think in terms of cash because that is how daily life works.
Fix: Ask when the right to receive or the duty to pay arose. Record on that date and adjust for outstanding and prepaid items.
Saying going concern means the business will never close.
The words sound absolute.
Fix: Say it assumes the business will continue for the foreseeable future with no intention or need to liquidate. If that fails, state the departure.
Using prudence to justify extra provisions or to ignore all gains.
Students remember 'be careful' but not the limit.
Fix: Prudence covers expected losses and not anticipated profits. Deliberate understatement of profit is not prudence.
Treating consistency as meaning a policy can never change.
Over-reading the word.
Fix: A change is allowed if required by law or a standard, or if it gives a better presentation. The change and its effect must be disclosed.
Listing the three AS 1 fundamental assumptions wrongly, such as including prudence or materiality.
All these terms appear together in notes.
Fix: Remember GCA: Going concern, Consistency, Accrual. Prudence, substance over form and materiality govern policy selection.
Confusing the business entity concept with the legal position of a sole proprietor.
Law treats a proprietor and the business as one person.
Fix: Say that in accounting, the business is a separate unit and the owner's capital is shown as a liability to the owner.

Worked examples

Example 1

Anand Traders pays an annual insurance premium of ₹24,000 on 1 January 2027 for the year ending 31 December 2027. Its accounting year ends on 31 March 2027. Using the accrual and matching concepts, find the insurance expense for the year ended 31 March 2027 and the prepaid amount.

Show the solution

Under accrual, expense is recorded for the period to which it relates, not when cash is paid.
The policy covers 12 months, so the monthly cost is ₹24,000 ÷ 12 = ₹2,000.
Months falling in the year ended 31 March 2027: January, February and March = 3 months.
Expense for the year = 3 × ₹2,000 = ₹6,000.
The remaining 9 months relate to the next year. Prepaid amount = 9 × ₹2,000 = ₹18,000.
Check: ₹6,000 + ₹18,000 = ₹24,000.

Answer: Insurance expense for the year is ₹6,000. The prepaid insurance of ₹18,000 is shown as a current asset.

Example 2

At the year end, Meera Enterprises has closing stock that cost ₹3,50,000. Its net realisable value is ₹3,10,000. It also has an expected sale profit on pending orders of ₹40,000 that the owner wants to record now. Explain, with reference to prudence, what should be done and state the stock value and the profit treatment.

Show the solution

Prudence says provide for expected losses but do not anticipate profits.
Stock is valued at the lower of cost and net realisable value.
Cost is ₹3,50,000 and net realisable value is ₹3,10,000. The lower figure is ₹3,10,000.
The write-down is ₹3,50,000 − ₹3,10,000 = ₹40,000. This expected loss is recognised in the current year.
The expected profit of ₹40,000 on pending orders has not yet been earned, so it is not recorded.
This also fits revenue recognition, since the sale has not been completed.

Answer: Closing stock is shown at ₹3,10,000, which reduces profit by ₹40,000. The expected profit of ₹40,000 is not recorded until the sale is made.

Exam tips

For differentiate-between questions on concepts and conventions, write points on nature, basis, and examples, and give a rupee example for each side.
Write the three AS 1 fundamental assumptions by name, and state that disclosure is needed only when one is not followed.
In application questions, name the concept before doing any calculation. The name earns marks even if arithmetic slips.
Keep short notes to the pattern of definition, example and effect on accounts. Do not write a full page for a 4 mark note.
Revise the link between matching and accrual. Examiners often ask for outstanding and prepaid items under this heading.

Practice questions from Introduction to Accounting

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 going concern and business entity. Conventions are customs developed over time to handle doubt and ensure fair reporting, such as prudence and consistency. Concepts are the foundation, and conventions guide practice.

What are the fundamental accounting assumptions under AS 1?

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

What is the difference between going concern and accrual?

Going concern assumes the business will continue for the foreseeable future, so assets are not valued as if being sold off. Accrual means income and expenses are recorded when earned or incurred, regardless of when cash is received or paid.

How does the matching concept relate to prudence?

Matching ties expenses to the revenue they helped earn in the same period. Prudence adds caution: expected losses are provided for, but expected gains are not recorded. Both aim at a fair measure of profit.