Accounting concepts are the basic assumptions on which every set of books rests, and accounting conventions are the customs that guide an accountant when a transaction is unclear. Together they keep financial statements consistent and comparable.
Below: the 10 concepts and 4 conventions with a rupee example for each, the three fundamental assumptions in Accounting Standard 1, and how concepts differ from conventions.
Accounting Concepts and Conventions: What They Are
Concepts decide what is recorded and how it is measured, and conventions guide the choices left open by the concepts. Without them, five accountants could report five different profits for the same business.
The two groups overlap in practice, and textbooks draw the line in slightly different places. Treat the split as a way to learn them, and not as a legal boundary.
| Question | Answer |
|---|---|
| What are concepts | Basic assumptions behind recording |
| What are conventions | Customs that guide judgment |
| Fundamental assumptions | Going concern, consistency, accrual |
| Accounting equation | Assets = Liabilities + Equity |
| Standard setter in India | ICAI |
The Three Fundamental Accounting Assumptions in AS 1
Accounting Standard 1 names three fundamental accounting assumptions: going concern, consistency and accrual. They are presumed to be followed, and only a departure from one of them has to be disclosed.
| Assumption | Meaning | If not followed |
|---|---|---|
| Going concern | The business continues for the foreseeable future | Disclose the fact |
| Consistency | Policies stay the same from period to period | Disclose the fact |
| Accrual | Items recorded when earned or incurred | Disclose the fact |
AS 1 also names three considerations for choosing a policy: prudence, substance over form and materiality. Disclosing a policy does not fix a wrong treatment of an item.
The 10 Accounting Concepts With Examples
Each concept answers one question about recording a transaction: whose is it, can it be measured, when is it recorded and at what value. The examples below use simple rupee figures.
| Concept | Rule | Example |
|---|---|---|
| Business entity | Business is separate from owner | Rs 50,000 taken for a holiday is drawings |
| Money measurement | Only rupee items are recorded | A staff dispute has no entry |
| Going concern | Business continues | Rs 15 lakh truck spread over 10 years |
| Accounting period | Life is cut into periods | A 12-month financial year |
| Dual aspect | Every entry has two sides | Rs 5 lakh loan adds cash and a liability |
| Accrual | Record when earned or incurred | March work is March revenue |
| Matching | Costs go with their revenue | Only the cost of units sold is expensed |
| Historical cost | Assets stay at cost | Land bought for Rs 10 lakh stays at cost |
| Revenue recognition | Income when earned | An advance is a liability until delivery |
| Objectivity | Entries need evidence | An invoice backs every purchase |
Business entity concept
The books treat the business as separate from its owner. A sole proprietor and the business are one person in law, but the accounts still keep them apart, so personal spending is recorded as drawings.
Going concern concept
A truck bought for Rs 15 lakh with a 10-year life and no residual value is charged at Rs 1.5 lakh a year. That is only sensible if the business is expected to run for the next ten years.
Dual aspect concept
Every transaction changes two accounts, which is why Assets always equal Liabilities plus Equity. A Rs 5 lakh bank loan adds Rs 5 lakh of cash on one side and Rs 5 lakh of loan on the other.
See the accounting equation for your own finances
Enter assets and liabilities to see what is left as net worth.
Accrual and revenue recognition
A consulting project finished in March and paid in May is March revenue. An advance of Rs 5,000 received in January for work due in April is a liability until the work is done.
Matching concept
If a shop buys 100 units at Rs 500 and sells 70, it charges Rs 35,000 to the period. The other 30 units, worth Rs 15,000, stay on the balance sheet as stock.
Historical cost concept
Land bought for Rs 10 lakh in 2010 stays at Rs 10 lakh in the books even if it now sells for Rs 1 crore. The cost is verifiable, but it can understate value, and the Inflation Calculator shows how far money has moved since.
The 4 Accounting Conventions With Examples
Conventions guide an accountant when the rules leave room for choice. The four most taught are consistency, conservatism, full disclosure and materiality.
| Convention | Practice | Example |
|---|---|---|
| Consistency | Keep the same method each year | Same depreciation method every year |
| Conservatism | Provide for losses, not gains | A likely lawsuit loss is provided for |
| Full disclosure | Report all material facts | A pending case goes in the notes |
| Materiality | Track only what matters | Rs 200 stapler expensed at once |
Consistency
A business that picks straight-line depreciation keeps it year after year, so the numbers can be compared. A change is acceptable if the law or a standard requires it or it gives a better presentation, and AS 1 asks for it to be disclosed.
Conservatism or prudence
The rule is to anticipate no profit and provide for every probable loss. Stock is carried at the lower of cost and net realisable value, so stock that cost Rs 400 and can now fetch Rs 350 is shown at Rs 350.
Full disclosure
Anything that could change a reader's decision belongs in the statements or the notes. A pending lawsuit is the usual example.
Materiality
Small items are grouped or expensed so the statements stay readable. Materiality filters what is shown, and full disclosure decides what must not be left out.
Difference Between Accounting Concepts and Conventions
Concepts are the assumptions behind recording, and conventions are customs that guide judgment. Textbooks call concepts rigid and conventions flexible, though real standards mix the two.
| Point | Concepts | Conventions |
|---|---|---|
| Meaning | Basic assumptions | Customs and practices |
| Role | Decide what is recorded | Guide choices and judgment |
| Origin | Logic of bookkeeping | Long use in practice |
| Flexibility | Treated as fixed | Allow some judgment |
| Examples | Entity, going concern, dual aspect | Consistency, prudence, materiality |
How the Concepts and Conventions Work Together
Several of them act on one transaction at once, and each pulls in a different direction. Accrual says when to record, matching says which period bears the cost, and prudence says to lean careful when unsure.
How to Apply the Concepts When Recording a Transaction
Run each transaction through the same short checklist before you post it. The order below follows the way the concepts build on each other.
Check it is measurable
Confirm it can be stated in rupees and belongs to the business, not the owner.
Get evidence
Hold an invoice, receipt, bank entry or contract for the amount.
Decide when to record
Record it when it is earned or incurred, not when cash moves.
Match the cost
Put the cost of earning the revenue in the same period as the revenue.
Record both sides
Enter the debit and the credit so the equation still balances.
Note the policy
Apply last year's method, and disclose a change or a material item in the notes.
Accounting Standards in India: AS 1 and Ind AS 1
In India, the Institute of Chartered Accountants of India issues the standards, and the Ministry of Corporate Affairs notifies the ones that companies must follow. AS 1 covers disclosure of accounting policies, and Ind AS 1 is its counterpart for companies under Ind AS.
Small businesses, professionals and traders keep books that follow the same ideas. A business that needs a tax audit has to keep proper books, as the guide on tax audit under Section 44AB explains.
Those on presumptive taxation keep fewer records, and the rules are set out in the guide to Section 44ADA. Your income tax then follows from the Income Tax Calculator.
Common Mistakes With Accounting Concepts
Most errors come from mixing cash with accrual, or from treating owner spending as a business cost. A few checks catch most of them.
Frequently Asked Questions: Accounting Concepts and Conventions
Disclaimer: The three fundamental assumptions and the considerations behind choosing accounting policies follow Accounting Standard 1 of the Institute of Chartered Accountants of India, as summarised in published study material. The ICAI text itself could not be opened for this page, so read AS 1 on icai.org before you rely on exact wording. Companies in India follow standards notified under the Ministry of Corporate Affairs rules. This page is general information and not accounting or tax advice.