Fundamentals of Accounting · Accounting Process

Accounting Concepts and Conventions for CSEET

Updated 11 October 2026 · Fact-checked

Accounting concepts are the basic assumptions on which accounts are recorded, such as going concern, accrual, money measurement and business entity. Conventions are customs that guide how you present figures, such as consistency, conservatism, materiality and full disclosure. To answer, define the term, give its effect on a figure, and add a short rupee example.

Understand Accounting Concepts and Conventions

Accounting needs common rules. If every business recorded transactions in its own way, no one could compare or trust the figures. Accounting concepts and conventions are those common rules. They sit behind every entry you pass and every statement you prepare.

Concepts are the basic assumptions or ideas that accounting is built on. Examples: business entity, money measurement, going concern, accounting period, cost, dual aspect, revenue recognition, matching and accrual. You can think of them as the foundation.

Conventions are customs or practices that accountants follow so that statements are clear, fair and comparable. The main ones are consistency, conservatism, materiality and full disclosure. You can think of them as the habits that guide judgement.

The line between the two is not sharp, and books sometimes group items differently. Many books also call these items principles or assumptions. In an exam, use the heading the question gives you. If asked to classify, follow the usual textbook grouping given here.

Two ideas are often confused. Going concern assumes the business will continue for the foreseeable future, so assets are shown at cost less depreciation, not at forced-sale value. Accrual means income and expenses are recorded when they are earned or incurred, not when cash is received or paid. One is about how long the business lives. The other is about when you record.

Key rules to remember

Business entity concept: Business and owner are separate; owner's capital = liability of the business; Owner's private expenses are drawings, not business expenses.
Money measurement concept: Only transactions measurable in money are recorded; Skills of staff or quality of management are not recorded.
Going concern concept: Business assumed to continue; assets shown at cost less depreciation; This is why prepaid expenses and fixed assets are carried forward.
Cost concept: Asset recorded at purchase cost, not market value; Cost is the base for later depreciation.
Dual aspect concept: Assets = Liabilities + Capital; Every transaction has two equal effects.
Accounting period concept: Life of business divided into periods, usually 12 months; Needed to find profit for a period.
Accrual and matching: Profit = Revenue earned in the period − Expenses incurred to earn it; Based on earning and incurring, not cash flow.
Realisation (revenue recognition): Revenue is recorded when goods are sold or service is rendered; Receipt of an order or advance alone is not sale.
Consistency: Same methods used year after year; Change only for a good reason, and disclose it.
Conservatism: Provide for all expected losses; ignore expected gains; Example: stock valued at lower of cost and net realisable value.
Materiality: Record or disclose items that could affect a decision; Very small items may be treated simply.
Full disclosure: All significant facts must be disclosed in the statements; Includes contingent liabilities and change of method.

How to solve Accounting Concepts and Conventions questions

Use this method for definition, classification, identify-the-concept and short-note questions.

1Read the question and mark the keyword: asset value, cash received, change of method, expected loss, personal expense, and so on.
2Decide whether the question is about a concept or a convention, or whether it asks you to name one.
3Match the keyword to the idea. Cash timing points to accrual. Asset at cost points to going concern or cost. Provision for doubtful debts points to conservatism.
4Write a one-line definition in your own words.
5Add a small rupee example showing the effect on profit, asset or liability.
6State the purpose or the effect if the concept is ignored.
7For a comparison, write two or three clear points of difference side by side in sentences.

Quickest way: Keyword to concept shortcut

When to use it: Use this for one-line identify-the-concept questions and for the first minute of a long answer.

Owner's personal expense, separate from business: business entity.
Only money values recorded: money measurement.
Business will not close soon, asset kept at cost less depreciation: going concern.
Income or expense recorded when earned or incurred, not paid: accrual.
Expenses set against the revenue they helped earn: matching.
Same method every year: consistency.
Provide for loss, ignore profit not yet earned: conservatism.
Tiny item treated simply: materiality.
Extra facts shown in notes: full disclosure.

Common mistakes in Accounting Concepts and Conventions

Treating accrual and matching as the same thing.
Both deal with timing, so they look alike.
Fix: Accrual decides when to record an item. Matching sets the expenses of a period against the revenue of that period.
Saying going concern means the business will never close.
The word 'continue' is read too strongly.
Fix: Say it is an assumption that the business will continue for the foreseeable future, with no plan to shut down or scale down sharply.
Applying conservatism to anticipate profits as well as losses.
Students remember 'anticipate' and forget the one-sided rule.
Fix: Remember: provide for all possible losses, record gains only when realised.
Calling consistency a rule that methods can never change.
Students overstate the word 'same'.
Fix: Methods can change if the law or a standard requires it, or if the change gives a fairer view. The change must be disclosed.
Recording an advance or an order as sales.
Confusing receipt of cash or order with sale.
Fix: Use the realisation concept. Sale is recorded when goods are delivered or the service is rendered.
Putting the owner's household expenses in the business books.
The owner and business feel like one person.
Fix: Apply business entity. Such amounts are drawings and reduce capital.

Worked examples

Example 1

Explain the difference between the going concern concept and the accrual concept. Give one example of each.

Show the solution

Define going concern: the business is assumed to continue for the foreseeable future.
Effect of going concern: assets are shown at cost less depreciation, not at the value they would fetch in a forced sale.
Example: a machine bought for ₹5,00,000 is depreciated over its life. It is not written down to scrap value, because the business will keep using it.
Define accrual: revenue and expenses are recorded when earned or incurred, whether or not cash has moved.
Example: rent of ₹12,000 for March is unpaid on 31 March. It is still shown as an expense of the year and as outstanding rent.
Difference: going concern concerns the life of the business and asset valuation. Accrual concerns the timing of recording income and expenses.

Answer: Going concern assumes the business will continue, so assets are carried at cost less depreciation (machine ₹5,00,000). Accrual records items when earned or incurred, so unpaid March rent of ₹12,000 is charged to the year. The first is about continuity and valuation, the second about timing.

Example 2

Anil Traders buys goods costing ₹80,000 and holds them as closing stock. At year end their net realisable value is ₹70,000. Another lot costing ₹40,000 has a net realisable value of ₹55,000. Which concept guides the valuation, and at what total value is the closing stock shown?

Show the solution

The question involves expected loss versus expected gain, so the convention is conservatism.
Stock is valued at the lower of cost and net realisable value.
First lot: cost ₹80,000, NRV ₹70,000. Lower value is ₹70,000.
Second lot: cost ₹40,000, NRV ₹55,000. Lower value is ₹40,000. The gain of ₹15,000 is not recorded.
Total closing stock = ₹70,000 + ₹40,000 = ₹1,10,000.

Answer: Conservatism applies. The expected loss of ₹10,000 is recorded, the unrealised gain of ₹15,000 is ignored, and closing stock is shown at ₹1,10,000.

Exam tips

Learn one rupee example for each concept. Written answers with an example score better than bare definitions.
For a 'differentiate' question, write at least two points of difference and name the basis of each.
In MCQs, look for the trigger word: separate, cost, continue, earned, same method, expected loss.
If a question uses the word principle, assumption or postulate, answer in terms of the same concepts and state which you are using.
Keep each short note to a definition, an example and a purpose. This fits the time available.

Practice questions from Accounting Process

Accounting Concepts 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 and Conventions: frequently asked questions

What is the difference between accounting concepts and conventions?

Concepts are the basic assumptions on which accounting rests, such as going concern and business entity. Conventions are customs followed to make statements clear and comparable, such as consistency and conservatism. Some books group these differently, so follow the grouping the question uses.

Is the accrual concept the same as the cash basis?

No. Under accrual, you record income when earned and expenses when incurred, even if cash is not received or paid. Under the cash basis, you record items only when cash moves.

Which concepts and conventions are most important for CSEET?

Know going concern, accrual, matching, business entity, money measurement, cost, consistency, conservatism, materiality and full disclosure. Be ready to define each, give a rupee example and tell them apart.

Can a business change its accounting method if consistency is a convention?

Yes. A change is allowed when required by law or a standard, or when it gives a fairer presentation of the accounts. The change and its effect should be disclosed.