Accounting concepts and conventions are the basic rules every accountant follows when recording and reporting transactions. Concepts are the underlying assumptions, such as business entity, money measurement, going concern, dual aspect and accrual. Conventions are customs that grew out of practice, such as consistency, full disclosure, conservatism and materiality. This guide explains all fourteen with a short Indian example each, then shows how they differ and how to write them in an exam.
Last checked on 28 October 2026 against NCERT Class 11 Accountancy Part I, chapter 2 (reprint 2026-27), ICAI’s AS 1 Disclosure of Accounting Policies and the ICAI Foundation study material (Paper 1, chapter 1, unit 2).
What are accounting concepts and conventions?
Give the same books to five accountants without common rules and you could get five different profit figures; the ICAI Foundation study material opens its unit with that example. Concepts and conventions are the shared rules that prevent it, part of what is called Generally Accepted Accounting Principles (GAAP).
NCERT gives the cleanest way to tell the two words apart: a concept refers to the “necessary assumptions and ideas which are fundamental to accounting practice”, while a convention means “customs or traditions as a guide to the preparation of accounting statements”. Concepts decide what gets recorded and how it is measured. Conventions guide the accountant’s judgement in measuring and presenting the results.
Accounting concepts and conventions: summary table
All fourteen in one place, with the group most B.Com textbooks put them in. Each section below adds an example and the point students usually miss, and the free PDF has the table with examples.
| Concept or convention | Usual textbook group | Meaning in one line |
|---|---|---|
| Business entity | Concept | The business is treated as separate from its owner. |
| Money measurement | Concept | Only events that can be measured in money are recorded. |
| Going concern | Concept | The business is assumed to continue for the foreseeable future. |
| Accounting period | Concept | Results are measured for fixed periods, usually a year. |
| Cost | Concept | Assets are recorded at what was paid to acquire them and make them ready for use. |
| Dual aspect | Concept | Every transaction has two effects of equal amount; Assets = Liabilities + Capital. |
| Revenue recognition (realisation) | Concept | Revenue is recorded when it is earned (goods sold or service rendered), not when cash arrives. |
| Matching | Concept | Expenses are set against the revenue of the same period. |
| Accrual | Concept | Revenue and costs are recorded when earned or incurred, not when cash moves. |
| Objectivity | Concept (some books: convention) | Entries rest on verifiable evidence, free from personal bias. |
| Consistency | Convention | The same accounting policies are used from one period to the next. |
| Full disclosure | Convention | All material and relevant facts are disclosed in the statements and notes. |
| Conservatism (prudence) | Convention | Do not anticipate profits; provide for known losses. |
| Materiality | Convention | Focus on items whose knowledge would influence a user's decision. |
The accounting concepts, with examples
These are the ten items most textbooks treat as concepts. The order follows the NCERT chapter, with accrual added after matching because NCERT covers it separately, under the basis of accounting. Every business and every figure below is made up for illustration.
1. Business entity concept
The books are kept from the business’s point of view. So capital brought in by the owner is an amount the business owes the owner, and money the owner takes out for personal use is drawings, which reduce that capital.
Example: Ravi runs Ravi Electronics in Laxmi Nagar. He pays his son’s ₹15,000 school fee from the shop’s bank account. That is not a business expense; it is recorded as drawings. Had he paid it from his own pocket, it would not appear in the business books at all.
This is an accounting rule only. A sole proprietor’s business is not separate in law, but in the books the two are kept apart.
2. Money measurement concept
Recording in money also means recording in one unit. Acres of land, kilograms of raw material and cartons of finished goods can’t be added together, but their rupee values can.
Example: Ravi Electronics has a cashier who is honest, fast and liked by customers. That is valuable, but it cannot be measured in rupees, so it never appears in the books.
The weakness is that a rupee does not keep its value. A plot bought ten years ago and one bought this year are added together at their old and new prices, as if money were worth the same in both years.
3. Going concern concept
Because the business is expected to keep running, an asset’s cost is spread over the years it will be used, rather than written off when it is bought or shown at what it would fetch today.
Example: Ravi buys a laptop for the shop for ₹60,000 and expects to use it for 3 years. He charges ₹20,000 a year as depreciation (straight line, ignoring scrap value) and carries the rest forward. If the shop were about to close, the laptop would instead be shown at what it could be sold for.
4. Accounting period concept
Owners, lenders and the tax department can’t wait for the business to end before they see results, so profit is measured for a fixed period. In India that is usually the year from 1 April to 31 March.
Example: Ravi Electronics closes its books for 1 April 2026 to 31 March 2027. A shorter period is used in special cases, for example when a partner retires mid-year, and listed companies also publish quarterly results.
5. Cost concept
The purchase price includes everything spent to make the asset ready for use, such as transport and installation, and that figure stays the basis in the books even when the market value moves.
Example: A small printing unit in Shahdara buys a machine for ₹2,00,000, pays ₹8,000 to transport it and ₹12,000 to install it. The machine is recorded at ₹2,20,000. Two years later a dealer says it would fetch ₹2,50,000. The books do not change, because the higher value has not been realised.
The drawback: when prices rise, the books can understate what the business is really worth.
6. Dual aspect concept
Because every transaction has two equal effects, the accounting equation always holds: Assets = Liabilities + Capital. NCERT calls dual aspect “the foundation or basic principle of accounting”.
Example: Meena starts a boutique with ₹5,00,000. Cash (an asset) goes up by ₹5,00,000, and capital goes up by ₹5,00,000. Next, she buys fabric on credit for ₹40,000. Stock goes up by ₹40,000 and creditors (a liability) go up by ₹40,000. The equation balances after each step: ₹5,40,000 of assets against ₹40,000 of liabilities plus ₹5,00,000 of capital.
Dual aspect is what makes double-entry bookkeeping work, and why a trial balance can agree at all. The golden rules of accounting are a way of deciding which of the two accounts to debit and which to credit.
7. Revenue recognition (realisation) concept
This concept answers one question: when is a sale a sale? NCERT’s answer is when a legal right to receive the money arises, which is when goods are sold or a service is rendered. Rent, interest and commission are recognised on a time basis.
Example: Meena sells dresses on credit worth ₹80,000 on 25 March 2027 and the customer pays on 10 April 2027. The ₹80,000 is revenue of the year ending 31 March 2027. An order received in March but not delivered until May is not revenue for March at all.
There are exceptions, such as long construction contracts, where revenue is recognised in proportion to the work completed.
8. Matching concept
Profit is the revenue of a period minus the expenses incurred to earn it, not minus everything spent during the year.
Example: A garment trader buys 500 shirts at ₹400 each (₹2,00,000) and sells 400 of them at ₹600 each (₹2,40,000) during the year.
- Cost of the 400 shirts sold: 400 × ₹400 = ₹1,60,000.
- Gross profit: ₹2,40,000 − ₹1,60,000 = ₹80,000.
- The 100 unsold shirts (₹40,000) are closing stock, carried into next year, where they will be matched with next year’s sales.
Treating the whole ₹2,00,000 as this year’s expense would understate profit by ₹40,000.
9. Accrual concept
Accrual applies the “earned or incurred” test to expenses and income as well as sales, which is what makes matching possible. The ICAI study material says the matching concept “is based on accrual concept”.
Example: The shop’s rent for March 2027 is ₹25,000 and is paid on 5 April 2027. On 31 March it is still an expense of 2026-27, shown as outstanding rent (a liability). Salary paid in advance for April is the opposite case: a prepaid expense (an asset). You will find adjusting entries like these in our journal entries questions with answers, and the accrual vs cash basis question is a favourite in accounting interview questions for freshers.
The cash basis records only cash received and paid. It is simpler, but it does not fit the matching principle, and NCERT calls it inappropriate for most organisations.
10. Objectivity concept
Each entry should be backed by a document someone else can check, such as an invoice, receipt or voucher, so the figures don’t depend on anyone’s opinion.
Example: Meena records a sewing machine at the ₹45,000 shown on the tax invoice, not at the ₹60,000 she thinks it is “really worth”. Anyone checking the books later can match the entry to the invoice.
Some textbooks list objectivity as a convention or leave it out. NCERT lists it as a concept and links it to cost: historical cost is used partly because it can be verified.
The accounting conventions, with examples
These four are the items most B.Com textbooks call conventions: practices that developed over time to make financial statements useful and comparable. NCERT includes all four in its list of basic accounting concepts, so if your syllabus follows NCERT, write them as concepts. All examples are made up.
11. Consistency
Consistency is what lets you compare this year’s profit with last year’s. It applies wherever more than one accounting method is acceptable, such as valuing inventory.
Example: A Delhi distributor has always valued its stock on the FIFO (first in, first out) basis. If it switches to the weighted average method, that is a change in accounting policy. AS 1 requires a change with a material effect to be disclosed, with the amount of that effect where it can be worked out.
Consistency does not forbid change. The ICAI material allows a change to comply with an accounting standard or the law, or when the new method gives a truer and fairer view. And valuing stock at “cost or market price, whichever is lower” is not inconsistent when it gives cost one year and market price the next; it is the same rule applied each year.
12. Full disclosure
Disclosure covers the notes as well as the figures. A reader should not be surprised later by something the business already knew.
Example: A customer has filed a claim of ₹3,00,000 against a firm and the case is pending. The firm does not know if it will lose, but it explains the claim in the notes to accounts so that a lender reading the statements has the full picture.
For companies, the required format and notes are set by Schedule III to the Companies Act 2013, which you can see in our balance sheet format guide. (The NCERT text still mentions the 1956 Act’s format; the 2013 Act replaced it.)
13. Conservatism (prudence)
In practice this means the accountant, when in doubt, picks the figure that does not overstate assets or profit. Losses that are known are provided for; gains wait until they are realised.
Example 1: Closing stock cost ₹1,00,000, but its market price has fallen to ₹90,000. It is shown at ₹90,000. If the market price had risen to ₹1,20,000, it would still be shown at ₹1,00,000, because the gain is not yet realised.
Example 2: Debtors stand at ₹2,00,000 and past experience suggests about 5% will not pay. A provision for doubtful debts of ₹10,000 is created now, before any customer actually defaults.
Prudence is caution, not pessimism. Deliberately understating assets creates secret reserves, and the ICAI material says prudence does not allow hidden reserves or excessive provisions. AS 1 puts it as: profits are recognised only when realised, and provision is made for all known liabilities and losses, even at a best estimate.
14. Materiality
Materiality lets small items be treated in the simplest way, even when a strict reading of another concept would suggest otherwise. It depends on the amount, the nature of the item and the size of the business.
Example: An office buys a stapler for ₹350. Strictly it is an asset that will last years, but it is charged to expenses in the year of purchase because showing and depreciating it would not change anyone’s decision. For a small business like this, a ₹20 lakh error or omission in the accounts is material.
The three fundamental accounting assumptions in AS 1
ICAI’s AS 1, Disclosure of Accounting Policies, says certain fundamental accounting assumptions underlie every set of financial statements. Para 10 names three: going concern, consistency and accrual.
| Assumption | What AS 1 says | Where this guide covers it |
|---|---|---|
| Going concern | The enterprise is viewed as continuing in operation for the foreseeable future, with neither the intention nor the necessity of liquidation or of materially curtailing its operations. | Concept 3 |
| Consistency | Accounting policies are assumed to be consistent from one period to another. | Convention 11 |
| Accrual | Revenues and costs are recognised as they are earned or incurred, not as money is received or paid, and recorded in the periods to which they relate. | Concept 9 |
The practical rule is in para 27. If the financial statements follow these three assumptions, nothing needs to be said about them. If one is not followed, that fact must be disclosed. So when a company’s accounts are silent on going concern, a reader is entitled to assume the business is expected to continue.
AS 1 then lists three considerations that guide the choice of accounting policies (para 17): prudence, substance over form (account for the economic reality of a transaction, not just its legal form) and materiality. Substance over form is not in the NCERT list, but it often appears in B.Com and CA Foundation questions.
Difference between accounting concepts and conventions
Exam papers often ask for this difference as a 3 or 5-mark question. These points are based on how NCERT and the ICAI study material describe each term.
| Point | Accounting concepts | Accounting conventions |
|---|---|---|
| Origin | Assumed and accepted to give accounting a logical structure | Developed out of accounting practice over a period of time |
| Purpose | Decide what is recorded and how it is measured | Guide judgement in measuring and presenting results |
| Judgement | Less judgement | More judgement, especially for materiality and prudence |
| Examples | Business entity, money measurement, going concern, dual aspect, accrual | Consistency, full disclosure, conservatism, materiality |
Ignore the claim, common online, that concepts are “mandatory” and conventions “optional”. Neither NCERT nor ICAI says that, and AS 1 requires disclosure of material policy changes whatever label you give consistency.
Where the sources differ
Textbooks don’t agree on which items are “concepts” and which are “conventions”, so two books can give you different lists and both be right for their own syllabus. Here is how the sources used in this guide treat the same items.
| Source | How it classifies | Points to note |
|---|---|---|
| NCERT Class 11, chapter 2 | All 13 items are “basic accounting concepts”; it says the terms principle, concept and convention are used interchangeably | Includes full disclosure and objectivity; covers accrual separately as a basis of accounting |
| ICAI Foundation study material, chapter 1 unit 2 | Uses “concepts”, “principles” and “conventions” interchangeably | Lists periodicity (accounting period) and accrual; treats full disclosure and prudence as qualitative characteristics |
| ICAI AS 1 | Fundamental accounting assumptions, plus three considerations for choosing policies | Consistency, a convention in most B.Com books, is one of the assumptions |
| Many B.Com textbooks | Separate concepts and conventions | Conventions are usually consistency, full disclosure, conservatism and materiality |
Learn the meaning of each item, then use the label your syllabus uses. The explanation and the example earn the marks, not the label.
All the concepts in one transaction set
To see how the concepts work together, follow Sharma Stationers, a made-up shop, through its first year (1 April 2026 to 31 March 2027). All figures are hypothetical.
| What happened | How it is treated | Concept or convention |
|---|---|---|
| Mr. Sharma puts ₹3,00,000 into the shop’s bank account | Bank (asset) and capital both rise by ₹3,00,000 | Business entity, dual aspect |
| He buys a photocopier for ₹90,000 plus ₹5,000 installation | Recorded at ₹95,000 | Cost |
| He expects to use it for 5 years | ₹19,000 depreciation a year (straight line, no scrap value) | Going concern, matching |
| Notebooks delivered to a school on credit on 28 March 2027; the school pays in April | Sale recorded on 28 March: revenue of 2026-27 | Revenue recognition (the goods were delivered, so the sale is earned) |
| March electricity bill paid in April | Expense of 2026-27, shown as outstanding | Accrual (the expense was incurred in March) |
| A ₹250 calculator for the counter | Charged to expenses | Materiality |
| Stock of old diaries costing ₹12,000 can now sell for only ₹7,000 | Closing stock written down to ₹7,000 | Conservatism |
| The shop’s good location attracts customers | Not recorded | Money measurement |
One transaction often applies two concepts at once; in an exam, name the main one and mention the second.
How to write this answer in an exam
For “Explain the accounting concepts and conventions” (5 to 10 marks):
- Define both terms in one line each, using the NCERT wording: concepts are basic assumptions; conventions are customs or traditions.
- List and explain each one in two lines, with a one-line example. Examples with rupee figures stand out.
For “Distinguish between…”, use the difference table above with two examples on each side; our guide to B.Com subjects shows where this topic sits in the first-year financial accounting paper.
Download: accounting concepts and conventions PDF
A two-page revision sheet with the summary table and examples, the AS 1 box, the concepts vs conventions table and six practice questions with answers. It is free to print and share with your class.
Accounting concepts and conventions in Hindi (लेखांकन अवधारणाएँ और परंपराएँ)
अवधारणाएँ (Accounting concepts): ये लेखांकन की बुनियादी मान्यताएँ हैं। जैसे व्यवसाय अपने मालिक से अलग माना जाता है (business entity), केवल वही लेन-देन लिखे जाते हैं जिन्हें रुपये में मापा जा सके (money measurement), हर लेन-देन के दो पहलू होते हैं (dual aspect), और आय व खर्च उसी वर्ष में दर्ज होते हैं जिससे वे संबंधित हैं, भले ही नकद बाद में मिले या दिया जाए (accrual)।
परंपराएँ (Accounting conventions): ये व्यवहार से बनी परंपराएँ हैं: हर साल एक ही तरीका अपनाना (consistency), सभी ज़रूरी बातें बताना (full disclosure), संभावित लाभ को पहले से न मानना पर संभावित हानि का प्रावधान करना (conservatism या prudence), और छोटी रकम को सरल तरीके से दर्ज करना (materiality)।
AS 1 की तीन मूल मान्यताएँ (fundamental accounting assumptions): going concern, consistency और accrual। अगर किसी का पालन नहीं हुआ तो यह बात वित्तीय विवरणों में बतानी होगी।
ध्यान दें: NCERT सभी 13 को “basic accounting concepts” कहती है, इसलिए परीक्षा में अपनी किताब वाला नाम लिखें।
How we teach this at IPA
IPA (Institute of Professional Accountants) has taught accounting in Laxmi Nagar, Delhi, since 2003, and the approach is practical: every entry has a consequence, and you see it in the final accounts. In the accounting foundations module of the 12-month ADFA diploma in financial accounting, students write the day book, cash book and ledger, reconcile the bank, pass rectification and depreciation entries, and finalise the trading and profit and loss account and balance sheet, and they work in Tally Prime and BUSY.
That is where these concepts stop being definitions: depreciation is going concern and matching, outstanding and prepaid adjustments are accrual, and closing stock valuation is conservatism. Batches are small, and students are encouraged to ask why an entry is made, not just how.
Frequently asked questions
How many accounting concepts are there?
There is no fixed number. NCERT Class 11 lists 13, and covers accrual separately, which makes 14 in this guide. The ICAI Foundation study material lists 12. Learn the list your syllabus uses.
Is conservatism the same as prudence?
Yes, NCERT treats them as the same. Both mean you do not anticipate profits but you provide for known losses, as in valuing stock at cost or market price, whichever is lower. Prudence does not allow hidden reserves.
Which accounting concept is the basis of double entry?
The dual aspect concept. Every transaction has two equal effects, so it is recorded in at least two accounts, and the accounting equation (Assets = Liabilities + Capital) always balances.
Is consistency a concept or a convention?
Most B.Com textbooks call it a convention, NCERT lists it as a concept, and AS 1 makes it a fundamental accounting assumption. The meaning is the same in all three: use the same policies every year and disclose any material change.