Core Definition
- →Accounting identifies, measures, records, and communicates financial information systematically.
- →Foundation for reliable financial reporting to stakeholders.
Core concepts
- 01Accounting: process of identifying, measuring, recording and communicating financial info.
- 02Going concern: entity will continue for the foreseeable future (typically 12 months).
- 03Accrual basis: revenue/expenses recorded when earned/incurred, not when cash flows.
- 04Consistency: same accounting policies applied period to period unless change is justified.
- 05Prudence: anticipate no profit, but provide for all probable losses.
- 06Materiality: items significant enough to influence decisions must be disclosed.
Flowchart summary
Accounting Concepts | +-- Going Concern ----> entity continues +-- Accrual --------> earned / incurred +-- Consistency ----> uniform policies +-- Prudence -------> conservatism +-- Materiality ----> disclose if relevant
Exam-critical pointers
- ⭐AS-1 disclosure of accounting policies is a 4-mark theory favourite.
- ⭐Distinguish fundamental assumptions (going concern, consistency, accrual) from conventions.
- ⭐Substance over form: record economic reality, not legal form (e.g., hire purchase).
- ⭐Money measurement concept excludes qualitative factors (employee morale, brand loyalty).
Visual mind-map
Chapter
Theoretical Framework
Fundamental Assumptions
- →Going concern: entity continues operations for foreseeable future (≥12 months).
- →Accrual basis: revenue/expenses recorded when earned/incurred, not cash receipt.
- →Consistency: same accounting policies applied across periods unless justified change.
Accounting Conventions
- →Prudence: anticipate no profits; provide for all probable losses conservatively.
- →Materiality: disclose items significant enough to influence stakeholder decisions.
- →Substance over form: record economic reality, not just legal structure.
AS-1 Compliance
- →Disclosure of accounting policies mandatory under AS-1 (4-mark exam favourite).
- →Distinguish fundamental assumptions from conventions in written answers.
- →Money measurement excludes qualitative factors (morale, brand value, intangibles).
Exam Applications
- →Hire purchase: apply substance over form; record as asset, not lease.
- →Related-party transactions: ensure consistency and full disclosure requirements.
- →Changes in accounting policy: justify and disclose impact with proper disclosure.
Explained simply
Imagine you run a toy shop. Accounting is like keeping a special notebook where you write down every toy you sell, every toy you buy, and all the money that comes in and goes out. 📓 This notebook helps you know if your shop is doing well.
Your toy shop will stay open tomorrow, next week, and next year. That's called going concern. It means you plan to keep selling toys forever, not close down next month. This matters because grown-ups trust your shop will be around to fix broken toys or give refunds.
Here's a story. On Monday you sell a toy to your friend for ten dollars, but she promises to pay you Friday. In real accounting, you write down that ten dollars on Monday, not Friday. That's accrual basis. 💰 You record money when you earn it, not when you touch it. But your mum uses a different rule—she only counts money when it lands in her purse. You must pick one way and stick with it every month. That's consistency.
Now, be smart like a squirrel. If you buy fancy toys, count them carefully. But if you lose one tiny marble, don't worry about it—that's not important enough to write down. That's materiality. However, always guess that bad things might happen (toys break, friends don't pay) and save extra money just in case. That's prudence—be careful, not careless.
For grown-up accountants: these six ideas are the rules of the whole game. They tell you how to write down money and tell stories about it honestly.
Make it click