Fundamentals of Accounting · Basic Concepts and Principles of Accounting

Accounting Concepts and Conventions for CSEET Paper 2

Updated 11 October 2026 · Fact-checked

Accounting concepts are the basic assumptions on which books are kept, such as business entity, going concern, money measurement, dual aspect, accrual and matching. Conventions are customary practices like consistency, conservatism, materiality and full disclosure. To solve a question, name the concept, state its meaning, and apply it to the given facts.

Understand Accounting Concepts and Conventions

Accounting needs a common set of ground rules. Without them, two accountants could record the same business and report very different profits. Concepts and conventions are those ground rules.

Concepts are the basic assumptions on which accounting is built. Conventions are practices that accountants follow by custom, so that statements are useful and comparable. In exams, the line between them is not always sharp, so learn the meaning and an example of each rather than only the label.

The main concepts:

Business entity: the business is treated as separate from its owner. If Ramesh takes ₹10,000 from his shop for personal use, it is drawings, not an expense.
Going concern: the business will continue for the foreseeable future, so assets are not valued as if they must be sold tomorrow.
Money measurement: only facts that can be expressed in money are recorded. The skill of your staff is not recorded.
Cost: assets are recorded at the price paid to acquire them.
Dual aspect: every transaction has two effects, which is why Assets = Capital + Liabilities always holds.
Accrual: income and expenses are recorded when earned or incurred, not when cash moves.
Matching: expenses of a period are set against the revenue they helped to earn in that period.
Realisation: revenue is recognised when it is earned, usually when goods are sold or services are rendered, not when an order is received.

The main conventions:

Consistency: use the same accounting policies from year to year so results can be compared.
Conservatism: provide for expected losses but do not anticipate profits.
Materiality: record separately only items large enough to influence decisions. A small item like a pencil can be treated as an expense.
Full disclosure: all significant information users need must be disclosed in the statements or notes.

The ICAI texts treat going concern, consistency and accrual as the fundamental accounting assumptions. AS 1 says that if they are followed, no specific disclosure is needed. If one is not followed, the fact should be disclosed.

Key rules to remember

Fundamental accounting assumptions (AS 1, para 10): Going Concern + Consistency + Accrual; These three are the fundamental assumptions. Others such as business entity and money measurement are commonly taught concepts but are not in this list.
Disclosure rule (AS 1, para 27): Assumption followed → no disclosure; not followed → disclose the fact; Write this whenever a question asks what happens if a fundamental assumption is violated.
Accounting equation (dual aspect): Assets = Capital + Liabilities; Holds after every transaction because each has two equal effects.
Accrual definition: Revenues and costs are recognised as earned or incurred, not as money is received or paid; Based on AS 1 para 10(c).
Going concern basis: No intention or need to liquidate or materially curtail operations; If such intention or need exists, statements may need a different basis, and that basis is disclosed (Framework para 23).
Matching: Expenses of the period are recognised along with the income they helped earn; Per Framework para 94, matching does not allow recognising items in the balance sheet that fail the definition of assets or liabilities.

How to solve Accounting Concepts and Conventions questions

Most questions ask you to define a concept, tell concepts from conventions, or say which one applies to a situation. Use this method.

1Read the question and mark the key fact: separate owner, cash versus earned, expected loss, tiny amount, same policy each year, and so on.
2Pick the matching concept or convention from that clue.
3State its meaning in one clear sentence.
4Apply it to the facts in the question, using the figures given.
5Show the effect on profit, assets or the books where asked.
6Close with the reason it matters: reliability, comparability or a true view.
7For a difference question, give at least three points in two columns or paired sentences.

Quickest way: Clue-to-concept lookup

When to use it: For MCQ-style short questions or when you have under two minutes for a part of an answer.

Owner's personal item mixed with business: business entity.
Asset kept at cost, not sale value: going concern or cost.
Cash received or paid differs from the period: accrual and matching.
Expected loss provided, expected gain ignored: conservatism.
Trivial amount expensed at once: materiality.
Same method every year: consistency.
Important facts shown in notes: full disclosure.

Common mistakes in Accounting Concepts and Conventions

Treating the owner and the business as one when the owner withdraws money.
In a sole proprietorship the law does not separate them, so students assume accounting does not either.
Fix: Remember accounting treats the business as separate. The owner's withdrawal is drawings and reduces capital.
Confusing accrual with matching.
Both deal with timing and are taught together.
Fix: Accrual decides when an item is recorded, on earning or incurring. Matching links expenses to the revenue of the same period.
Saying conservatism means ignoring all profits and exaggerating losses.
The phrase 'anticipate no profit, provide for all losses' is memorised without its limits.
Fix: Say it means prudence about expected losses and unearned gains. It does not permit deliberately understating profit.
Saying consistency means policies can never change.
The word suggests rigidity.
Fix: Write that policies are kept the same from period to period, and a change should be disclosed with its effect, in line with comparability (Framework para 40).
Calling going concern a guarantee that the business will never close.
Students read the concept as a fact, not an assumption.
Fix: It is an assumption that holds unless there is an intention or need to liquidate or curtail operations materially.
Listing business entity or money measurement as fundamental assumptions under AS 1.
Textbooks list many concepts together.
Fix: When AS 1 is asked, name only going concern, consistency and accrual.

Worked examples

Example 1

Distinguish between the going concern concept and the business entity concept. Give one example of each.

Show the solution

Going concern: the business is assumed to continue for the foreseeable future with no intention or need to liquidate or curtail operations materially.
Business entity: the business is treated as a unit separate from its owner.
Going concern concerns time, that is, the life of the business. Business entity concerns identity, that is, who owns what.
Example of going concern: machinery bought for ₹5,00,000 is depreciated over its useful life, not written off at its forced sale value.
Example of business entity: the proprietor pays ₹20,000 of his child's school fees from the business bank account. It is recorded as drawings, not a business expense.

Answer: Going concern assumes the business continues; business entity separates the business from its owner. Fees of ₹20,000 are drawings, and machinery is depreciated over its life.

Example 2

A trader, Meena Traders, paid ₹60,000 on 1 January for a one-year insurance policy running from 1 January to 31 December. Its accounting year ends 31 March. Which concepts apply, and how much insurance expense belongs to the year ending 31 March?

Show the solution

Cash of ₹60,000 was paid in the year, but the accrual concept says an expense is recorded when incurred, not merely when paid.
Cover for 12 months costs ₹60,000, so ₹5,000 per month.
Cover used up from 1 January to 31 March is 3 months, so expense = 3 × ₹5,000 = ₹15,000.
The remaining 9 months are 9 × ₹5,000 = ₹45,000. This relates to the next period, so it is a prepaid expense, shown as an asset.
Matching is applied: only the cost that helped earn this year's revenue is charged against this year's income.

Answer: Insurance expense for the year is ₹15,000. The balance of ₹45,000 is prepaid, carried forward by the accrual and matching concepts.

Exam tips

Learn one clear sentence and one rupee example for each concept and convention. Examiners often ask for examples.
For 'differentiate' questions, give at least three points, such as meaning, basis, effect and example.
If AS 1 or the Framework is mentioned, name going concern, consistency and accrual as the fundamental assumptions.
In case-based questions, name the concept first, then apply it with the figures. This earns both theory and calculation marks.
Keep definitions short. A neat two-line meaning plus an example scores better than a long paragraph.

Practice questions from Basic Concepts and Principles of Accounting

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 is built, such as business entity and dual aspect. Conventions are customary practices that guide how statements are prepared, such as consistency and conservatism. Many books overlap them, so focus on meaning and examples.

Which are the fundamental accounting assumptions?

AS 1 names three: going concern, consistency and accrual. If they are followed, no specific disclosure is needed. If one is not followed, the fact should be disclosed.

How is the accrual concept different from the matching concept?

Accrual says revenue and costs are recorded when earned or incurred, not when cash is received or paid. Matching sets the expenses of a period against the revenue they helped earn. Accrual is about timing of recording, matching is about linking costs to income.

What is the materiality convention?

It says only items large enough to influence the decisions of users need separate treatment. A small item such as stationery of trivial value can be treated as an expense at once. What is material depends on the size and nature of the item.