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Fundamentals of Accounting · Basic Concepts and Principles of Accounting

Accounting Principles and Basis of Accounting for CSEET

Updated 11 October 2026 · Fact-checked

Accounting principles are the rules and assumptions (GAAP) that guide how transactions are recorded and reported. The basis of accounting decides when you record them: on cash basis when cash moves, on accrual basis when the transaction occurs. Companies use accrual. Solve questions by applying the accounting equation: Assets = Liabilities + Capital.

Understand Accounting Principles and Basis of Accounting

GAAP means Generally Accepted Accounting Principles. These are the rules, concepts and conventions that accountants follow so that financial statements are consistent and can be compared. In India, GAAP rests on the Companies Act, accounting standards issued by ICAI, and accepted practice. Typical features: they are developed by custom and by professional bodies, they guide rather than fix one method for everything, and they change as business changes.

The accounting equation is the base of double entry: Assets = Liabilities + Capital. Assets are what the business owns. Liabilities are what it owes to outsiders. Capital is the owner's claim. Every transaction changes the equation but keeps both sides equal.

The basis of accounting is about timing. Under the cash basis, you record income when cash is received and expense when cash is paid. Under the accrual basis, you record the effect of a transaction when it occurs, not when cash moves. The ICAI Framework (paragraph 22) says financial statements are prepared on the accrual basis. Such statements show not only past cash flows but also obligations to pay cash later and resources that will bring cash in future.

Accrual basis is one of the three fundamental accounting assumptions: going concern, consistency and accrual. AS 1 (paragraph 27) says that if these are followed, no specific disclosure is needed. If one is not followed, the fact must be disclosed.

Accounting standards are issued by ICAI to reduce the alternative treatments allowed. AS 1 notes that alternatives will not vanish completely because enterprises face different circumstances. The Framework is not itself a standard. Nothing in it overrides a specific Accounting Standard, and if there is a conflict, the Standard prevails. In India, companies follow either the Accounting Standards (AS) or Ind AS, which is the Indian standards converged with IFRS, the international standards issued by the IASB. Which set applies depends on the company's category under the rules.

Key rules to remember

Accounting equation
Assets = Liabilities + Capital
Must balance after every transaction.
Capital (rearranged)
Capital = Assets − Liabilities
Also called owner's equity or net worth.
Cash basis
Income = cash received; Expense = cash paid
Ignores amounts due or outstanding.
Accrual basis income/expense
Income earned and expenses incurred are recorded in the period they relate to
Adjust for outstanding and prepaid items, and income accrued or received in advance.
Fundamental assumptions
Going concern, Consistency, Accrual
AS 1 para 27: disclose only if one is not followed.

How to solve Accounting Principles and Basis of Accounting questions

Use this method for theory questions and for numerical questions on the equation or the basis of accounting.

  1. 1Identify what is asked: a definition, a comparison, or a calculation.
  2. 2For theory, define the term first in one line, then give features or points.
  3. 3For equation questions, list every item as an asset, a liability or capital.
  4. 4Apply Assets = Liabilities + Capital and find the missing figure.
  5. 5For basis questions, ask: did the event occur in this period, or only the cash move?
  6. 6Under accrual, adjust for outstanding, prepaid, accrued and advance items; under cash, take only cash flows.
  7. 7Check that both sides of the equation agree, then write the answer with units in rupees.

Quickest way: Three-line check

When to use it: Use in MCQs and short numericals when time is tight.

  1. Write A = L + C and place each given figure under it.
  2. Solve for the single unknown.
  3. For basis questions, ask only: when did the transaction happen, and when did cash move? Accrual follows the first, cash follows the second.

Common mistakes in Accounting Principles and Basis of Accounting

  • Treating accrual basis as recording only cash transactions.

    Students confuse 'received' with 'earned'.

    Fix: Remember accrual records effects when they occur, not when cash is received or paid (Framework para 22).

  • Putting drawings or outstanding expenses on the wrong side of the equation.

    Rushing without classifying items.

    Fix: Drawings reduce capital. Outstanding expenses are liabilities.

  • Saying the Framework overrides accounting standards.

    It sounds like the higher document.

    Fix: The Framework is not a standard. If there is a conflict, the Accounting Standard prevails.

  • Writing that Ind AS and IFRS are the same thing.

    Ind AS is converged with IFRS, so they look alike.

    Fix: IFRS is issued by the IASB. Ind AS is the Indian version, converged with it and applied under Indian rules.

  • Writing that GAAP is a single fixed law.

    The word 'generally accepted' is overlooked.

    Fix: Describe GAAP as a body of laws, standards and accepted practices that guides accounting.

Worked examples

Example 1

Rohan starts a business with cash ₹5,00,000. He buys furniture for ₹1,00,000 in cash and goods for ₹1,50,000 on credit from Mehta Traders. Find the capital, assets and liabilities after these transactions.

Show the solution
  1. Capital introduced = ₹5,00,000.
  2. Cash left = 5,00,000 − 1,00,000 = ₹4,00,000.
  3. Assets = cash 4,00,000 + furniture 1,00,000 + stock 1,50,000 = ₹6,50,000.
  4. Liabilities = creditor Mehta Traders ₹1,50,000.
  5. Check: 1,50,000 + 5,00,000 = ₹6,50,000, which equals assets.

Answer: Assets ₹6,50,000 = Liabilities ₹1,50,000 + Capital ₹5,00,000.

Example 2

For the year ended 31 March, a firm paid rent of ₹60,000 in cash, of which ₹10,000 is for the next year, and ₹5,000 of rent for this year is still unpaid. What is the rent expense under cash basis and under accrual basis?

Show the solution
  1. Cash basis: only cash paid counts, so expense = ₹60,000.
  2. Accrual basis: start with the amount paid, ₹60,000.
  3. Remove the prepaid part: 60,000 − 10,000 = ₹50,000.
  4. Add the outstanding part: 50,000 + 5,000 = ₹55,000.

Answer: Rent expense is ₹60,000 on cash basis and ₹55,000 on accrual basis.

Exam tips

  • For 'distinguish between' questions, write cash and accrual points side by side in matching rows: recording time, outstanding items, use by companies.
  • Quote the idea from the Framework that accrual shows future cash obligations and receivables as well as past cash flows.
  • State the three fundamental assumptions by name, and add the AS 1 disclosure rule.
  • In numericals, show the equation line at the end to prove it balances.
  • Keep Ind AS versus IFRS answers short: IFRS is international, Ind AS is India's converged version.

Practice questions from Basic Concepts and Principles of Accounting

Accounting Principles and Basis of Accounting in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Accounting Principles and Basis of Accounting: frequently asked questions

What is GAAP in simple words?

GAAP stands for Generally Accepted Accounting Principles. It is the set of rules, standards and accepted practices that businesses follow when preparing financial statements. It keeps accounts consistent and comparable.

What is the main difference between cash basis and accrual basis?

Cash basis records a transaction when cash is received or paid. Accrual basis records it when it occurs, whether or not cash has moved. Companies prepare financial statements on accrual basis.

Does the accounting equation always balance?

Yes. Every transaction affects at least two items in a way that keeps Assets equal to Liabilities plus Capital. If it does not balance, there is an error in classification or calculation.

Are Ind AS and IFRS the same?

No. IFRS are international standards issued by the IASB. Ind AS are Indian accounting standards converged with IFRS. Which set a company follows depends on the rules applicable to it.