Commercial StudiesICSE Class 9 · Introduction to Accounting

Basic Accounting Terms, Accounting Concepts and the Accounting Equation (ICSE Class 9)

Updated 18 October 2026 · Fact-checked

The key terms are capital, liability, asset, revenue, expense, purchases, sales, stock, debtors, creditors, drawings, debit and credit and discount. The concepts are business entity, money measurement, going concern, accounting period, dual aspect, matching and full disclosure. Dual aspect gives the accounting equation Assets = Liabilities + Capital, which stays true after every transaction.

Understand Basic Accounting Terms, Accounting Concepts and the Accounting Equation

Basic terms.

Capital: money or assets invested by the owner; it is a liability of the business to the owner. It increases with profit and added capital and decreases with losses and drawings.
Liability: an amount the business owes to outsiders (creditors, bank loan, outstanding expenses).
Asset: a thing of value owned that gives future benefit; fixed assets (land, building, machinery, furniture) and current assets (cash, bank, stock, debtors).
Drawings: money or goods taken by the owner for personal use; they reduce capital.
Debtors owe money to the business (assets); creditors are owed money by the business (liabilities).
Revenue: amount earned from normal activities plus incomes such as commission, rent or interest received. Expense: cost of earning revenue (wages, rent, salaries).
Purchases: goods bought for resale (buying a machine or furniture for use is buying an asset). Sales: goods sold in which the business deals (selling an old machine is a sale of an asset).
Stock: goods unsold on a date (opening stock, closing stock).
Debit and credit: the left-hand and right-hand sides of an account.
Discount: trade discount is a deduction from the list price for buying in quantity, shown on the invoice and not recorded in the books; cash discount is given for prompt payment and is recorded in the books.

Concepts.

Business entity: the business is a unit separate from its owner; the owner's private expense is drawings.
Money measurement: only what can be expressed in money is recorded.
Going concern: the business is assumed to continue, so fixed assets are shown at cost and spread over their life.
Accounting period: the life of the business is divided into short periods, usually a year (in India 1 April to 31 March).
Dual aspect: every transaction has a debit and a credit of equal amount.
Matching: expenses of a period are matched against the revenue of the same period, whether paid or not.
Full disclosure: all material information must be fully and honestly shown.

The accounting equation. Assets = Liabilities + Capital, or Capital = Assets - Liabilities. Every transaction changes the items but keeps both sides equal. Build a table with a row for each transaction.

Neighbouring topics: accounting, bookkeeping, objectives and the accounting cycle are on the previous page of this chapter.

Basic Accounting Terms, Accounting Concepts and the Accounting Equation: key facts

Accounting equation: Assets = Liabilities + Capital
Capital = Assets - Liabilities
Liabilities = Assets - Capital; Holds after every transaction.
Discounts: Invoice amount = List price - Trade discount | Amount paid = Invoice amount - Cash discount; Cash discount is on the invoice amount.
Matching: Expense of the year = Amount for the months of the year | the rest is prepaid or outstanding; Whether paid or not.
Capital changes: Capital rises with profit and added capital | falls with loss and drawings; Drawings reduce capital.

Basic Accounting Terms, Accounting Concepts and the Accounting Equation in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Shop and its owner

Suppose Mr Shah, the owner of a stationery shop, pays his house electricity bill from the shop's cash.

How should this be recorded and which concept applies?

Try it first, then show the solutionSolution

The shop and the owner are separate units.
The bill is the owner's personal expense, not a business expense.
It is treated as drawings, which reduce the owner's capital.

Answer: It is recorded as drawings under the business entity concept, not as an expense of the shop.

Memory hook: The business is not the owner.

Tricks to remember Basic Accounting Terms, Accounting Concepts and the Accounting Equation

Short memory aids. Say each one aloud once, then use it on a question the same day.

A = L + C
Assets equal what you owe plus what the owner put in.
Use it when: Accounting equation.
Trade on the bill, cash for quick payment
Trade discount is on the invoice; cash discount rewards prompt payment.
Use it when: Discounts.
B-M-G-A-D-M-F
Entity, Money, Going concern, Period, Dual aspect, Matching, Full disclosure.
Use it when: Concepts.

Basic Accounting Terms, Accounting Concepts and the Accounting Equation: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: An asset · 1 mark · MCQBoard level

Which of the following is an asset of the business?
(a) creditors (b) debtors (c) bank loan (d) drawings

Try it first, then show the solutionSolution

Debtors owe money to the business, so they are assets.

Answer: (b) debtors

Example 2: Transactions and the equation · 4 marks · Long answerHarder board level

Rina starts with Rs 1,00,000 in cash as capital. (1) She buys furniture for Rs 20,000 cash. (2) She buys goods on credit for Rs 30,000. (3) She takes a bank loan of Rs 50,000 in cash. (4) She withdraws Rs 10,000 cash for personal use. Find assets, liabilities and capital after each transaction and show that the equation holds.

Try it first, then show the solutionSolution

Start: Assets 1,00,000 = Liabilities 0 + Capital 1,00,000. (1 mark)
After (1): cash 80,000 + furniture 20,000 = 1,00,000 = 0 + 1,00,000. After (2): stock 30,000 added, so assets 1,30,000 = creditors 30,000 + 1,00,000. (1 mark)
After (3): cash rises by 50,000, so assets 1,80,000 = liabilities 80,000 + 1,00,000. (1 mark)
After (4): cash falls by 10,000, so assets 1,70,000 = liabilities 80,000 + capital 90,000. (1 mark)

Answer: After (1): 1,00,000 = 0 + 1,00,000. (2): 1,30,000 = 30,000 + 1,00,000. (3): 1,80,000 = 80,000 + 1,00,000. (4): 1,70,000 = 80,000 + 90,000. The equation always holds.

Example 3: Trade and cash discounts · 3 marks · Short answerHarder board level

A trader lists goods at Rs 40,000 and allows a trade discount of 15 per cent. The buyer pays promptly and gets a cash discount of 3 per cent. Find the invoice amount and the amount paid.

Try it first, then show the solutionSolution

Trade discount = 15% of 40,000 = Rs 6,000, so invoice amount = Rs 34,000. (1 mark)
Cash discount = 3% of 34,000 = Rs 1,020. (1 mark)
Amount paid = 34,000 - 1,020 = Rs 32,980. (1 mark)

Answer: Invoice Rs 34,000; paid Rs 32,980

Example 4: Case study: which concept · 4 marks · Case-basedHOTS / competency

Identify the concept in each situation: (i) the owner pays his personal telephone bill from business cash; (ii) a machine bought for Rs 3,00,000 with a 10-year life is shown at cost and its cost is spread over the years; (iii) the honesty of the manager is not recorded in the books; (iv) a pending court claim against the firm is explained in the notes to the statements.

Try it first, then show the solutionSolution

(i) Business entity: it is drawings, not an expense.
(ii) Going concern: the business is expected to continue.
(iii) Money measurement: it cannot be expressed in money.
(iv) Full disclosure: material information is shown.

Answer: (i) business entity (ii) going concern (iii) money measurement (iv) full disclosure

Example 5: Matching principle · 3 marks · Short answerHarder board level

A firm pays Rs 12,000 on 1 October for a 12-month insurance policy. Its accounting year ends on 31 March. How much is charged to the year and how much belongs to the next year? Which principle applies?

Try it first, then show the solutionSolution

The policy covers 1 October to 30 September; 6 months fall in the year ending 31 March. (1 mark)
Charge for the year = 12,000 x 6 / 12 = Rs 6,000; the remaining Rs 6,000 relates to the next year. (1 mark)
This is the matching principle: expenses are matched with the revenue of the same period. (1 mark)

Answer: Rs 6,000 for the year and Rs 6,000 for the next year; matching principle.

Where students lose marks in Basic Accounting Terms, Accounting Concepts and the Accounting Equation

The slips examiners see most often, and what to write instead.

Mistake: Cash discount on the list price
The base is wrong.
Wrong working
3% of 40,000
Right working
3% of the invoice amount 34,000
Do this: Deduct trade discount first.
Usually costs: 1 mark
Mistake: Treating owner's expense as business expense
Entity concept is ignored.
Wrong working
Rent expense for the owner's house
Right working
Drawings
Do this: The business is separate.
Usually costs: 1 mark
Mistake: Equation not balanced
One item is forgotten.
Wrong working
Assets 1,80,000 = liabilities 50,000 + capital 1,00,000
Right working
Add the credit purchase to liabilities too
Do this: Check both sides after each transaction.
Usually costs: 2 marks

Exam tips

Check the equation after every transaction in a table.
Define each term and give a short example.
Write the concept name along with the example.
Do trade discount first, then cash discount on the reduced amount.

Practice questions on Basic Accounting Terms, Accounting Concepts and the Accounting Equation

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
Assets are Rs 5,00,000 and liabilities Rs 1,20,000. Capital is:
(a) Rs 6,20,000 (b) Rs 3,80,000 (c) Rs 4,20,000 (d) Rs 1,20,000
Hint
Capital = Assets - Liabilities.
Answer
(b) Rs 3,80,000
Q2 · 2 marks · Very short answerBoard level
Define drawings and say how they affect capital.
Hint
Owner takes for personal use.
Answer
Drawings are money or goods taken out of the business by the owner for personal use. They reduce capital.
Q3 · 3 marks · Short answerHarder board level
Assets of a firm are Rs 6,40,000 and its capital is Rs 4,15,000. Find the liabilities. If the firm then buys goods on credit for Rs 35,000, find the new assets and liabilities.
Hint
Liabilities = Assets - Capital.
Answer
Liabilities = 6,40,000 - 4,15,000 = Rs 2,25,000. After the credit purchase assets = 6,75,000 and liabilities = 2,60,000; capital remains Rs 4,15,000, and 6,75,000 = 2,60,000 + 4,15,000.
Q4 · 3 marks · Short answerHarder board level
Classify as purchases or an asset purchase: (i) goods bought for resale; (ii) a machine for the factory; (iii) raw materials; (iv) a computer for the office.
Hint
Is it for use or for resale?
Answer
(i) purchases (ii) asset (iii) purchases (iv) asset
Q5 · 3 marks · Short answerHOTS / competency
Why are fixed assets shown at cost and not at the price they would fetch if sold? Name the concept.
Hint
The business is assumed to continue.
Answer
Under the going concern concept the business is assumed to continue for a long time, so fixed assets are for use, not for sale. They are shown at cost and the cost is spread over their useful life.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Write the accounting equation.Show answer
Assets = Liabilities + Capital
2.Which discount is recorded in the books?Show answer
Cash discount.
3.What are debtors?Show answer
Persons who owe money to the business.
4.What is the business entity concept?Show answer
The business is a unit separate from its owner.
5.When does the Indian financial year start?Show answer
1 April.
6.What is the dual aspect concept?Show answer
Every transaction has a debit and an equal credit.

Basic Accounting Terms, Accounting Concepts and the Accounting Equation: frequently asked questions

Is capital a liability?

To the business it is an amount owed to the owner.

Do drawings appear as an expense?

No, they reduce capital.

Is trade discount recorded?

No, it is deducted on the invoice and not shown separately in the books.