Accounting Concepts and Conventions for UPSC EPFO APFC: Going Concern, Accrual, Matching, Prudence and 10 MCQs
Accounting concepts and conventions are the few basic rules every APFC accounting question rests on. Why is a building shown at cost and not market value? Why is unpaid rent still an expense? Why do we provide for bad debts but ignore expected gains? This page answers all of that in one picture and ten short sections. For more APFC notes, open the Study Directory.
Who and what
- Business entity
- Money measurement
- Dual aspect
Time
- Going concern
- Accounting period
Value
- Historical cost
- No market revaluation by default
Income
- Realisation
- Accrual
- Matching
Conventions
- Consistency
- Conservatism (prudence)
- Materiality · Full disclosure
AS 1 core
- 3 assumptions: GC, Consistency, Accrual
- 3 policy guides: Prudence, Substance, Materiality
1Accounting concepts and conventions
Both accounting concepts and conventions are part of GAAP (generally accepted accounting principles). The difference is only in where they come from.
Concepts
- Basic assumptions
- The base on which accounts are built
- Example: going concern, dual aspect
Conventions
- Customs grown from practice
- Guide how we apply the concepts
- Example: conservatism, materiality
2Business entity and money measurement
Business entity: the business is separate from its owner. So capital is a liability of the business towards the owner, and goods taken for personal use are drawings.
Money measurement: only events that can be measured in money are recorded. Staff morale or a strike threat is important, but it is not entered in the books.
3Dual aspect
Every transaction has two equal sides: a debit and a credit. This is the base of double entry.
Example: the owner brings ₹1,00,000 cash. Cash (asset) rises by ₹1,00,000 and capital rises by ₹1,00,000. The equation stays balanced.
4Going concern and accounting period
Going concern: we assume the business will keep running in the foreseeable future. That is why fixed assets are shown at cost less depreciation, not at break-up value.
Accounting period: the endless life of a business is cut into equal periods, usually one year, so profit can be measured and compared. For companies in India, the financial year usually runs from 1 April to 31 March.
5Historical cost
Assets are recorded at the price paid to acquire them, including costs to bring them into use. A rise in market value is not booked by default.
| Case | Recorded at |
|---|---|
| Land bought for ₹50 lakh, now worth ₹80 lakh | ₹50 lakh (cost) |
| Machine bought ₹10 lakh + ₹50,000 installation | ₹10.5 lakh |
| Asset received free as a gift | Not recorded at cost (no cost paid); special treatment |
The main criticism: in inflation, cost-based balance sheets understate asset values.
6Realisation, accrual and matching
These three decide when income and expenses enter the Profit and Loss Account.
Realisation
- Revenue is recognised when earned
- Usually at sale or delivery, not on order or cash
Accrual
- Record income and expense when they arise
- Not when cash moves
Matching
- Set the year’s expenses against the year’s revenue
- Gives true profit
Year-end adjustments come from these ideas: outstanding expenses, prepaid expenses, accrued income and income received in advance.
7Conservatism (prudence)
“Anticipate no profit, but provide for all known losses.” Profits are recognised only when realised, though not necessarily in cash. When unsure, choose the option that does not overstate assets or profit.
| Example | Why it is conservatism |
|---|---|
| Stock valued at cost or NRV, whichever is lower | Expected loss booked, expected gain ignored |
| Provision for doubtful debts | Possible loss provided for |
| Contingent gains not recognised | Profit not anticipated |
Too much caution creates secret reserves, which hides the true position. So prudence must not become deliberate understatement. See how the stock rule works in our inventory valuation (AS 2) notes for APFC.
8Consistency, materiality, full disclosure
Consistency
- Same method year after year
- Change only for law, a standard or a better view
- Disclose the change and its effect
Materiality
- Show what can change a user’s decision
- A ₹200 stapler can be expensed
Full disclosure
- Reveal all significant facts
- Notes, contingent liabilities, policies
9AS 1: the three fundamental assumptions
| Group under AS 1 | Items | Disclosure rule |
|---|---|---|
| Fundamental accounting assumptions | Going concern, Consistency, Accrual | No disclosure needed if followed; disclose if not followed |
| Considerations in selecting policies | Prudence, Substance over form, Materiality | Guide the choice of policies |
| Accounting policies | e.g. depreciation method, stock method | All significant policies disclosed in one place |
AS 1 also says a wrong treatment is not made right just by disclosing it.
10Accounting concepts and conventions: traps and one-glance summary
- Capital as a liability comes from business entity, not dual aspect.
- Lower of cost or NRV is conservatism, not consistency.
- Prudence is a consideration under AS 1, not a fundamental assumption.
- Recording revenue when the order is received breaks realisation.
- Consistency does not forbid changing a method.
| Principle | One-line meaning | Classic example |
|---|---|---|
| Business entity | Owner and business are separate | Drawings, capital as liability |
| Money measurement | Only money-measurable events | Staff skill not recorded |
| Dual aspect | Every debit has a credit | A = L + C |
| Going concern | Business will continue | Depreciation, prepaid expenses |
| Accounting period | Life split into years | Annual accounts |
| Historical cost | Record at cost | Land at purchase price |
| Realisation | Revenue when earned | Sale on delivery |
| Accrual | Record when due, not when paid | Outstanding rent |
| Matching | Costs against related revenue | Closing stock adjustment |
| Conservatism | Provide for losses, not gains | Lower of cost or NRV |
| Consistency | Same method each year | Fixed depreciation method |
| Materiality | Ignore trivial items | Small tools expensed |
| Full disclosure | Reveal significant facts | Contingent liabilities in notes |
10 practice MCQs with score analysis
Answer all ten, then press Submit. You will see correct, wrong and blank counts, your percentage and an explanation for each question.
FAQ
What are the fundamental accounting assumptions under AS 1?
Going concern, consistency and accrual. If they are followed, no separate disclosure is needed. If any is not followed, that fact must be disclosed.
Is prudence a fundamental assumption?
No. Under AS 1, prudence is one of three considerations for selecting accounting policies, with substance over form and materiality.
Which concept explains why capital is shown as a liability?
The business entity concept. The business owes the capital back to its owner.
Must companies use the accrual basis?
Yes. Section 128(1) of the Companies Act, 2013 requires books on the accrual basis and the double entry system.