Accounting Concepts: ISC Class 11 Accounts Notes on GAAP and IFRS

What Accounting Concepts is about

Weightage: Accounting Concepts belongs to the unit Accounting Concepts, which CISCE weights at 4 of the 80 marks in the ISC Class XI Accountancy Paper I (Theory). Class XI is examined by the school, so your school sets the paper within this weightage.Source: CISCE ISC Accountancy syllabus, examination year 2028, Class XI unit weightage

Key concepts

Going concern, accounting entity and money measurement

• Going concern: the business is assumed to continue for the foreseeable future and not to close down. That is why fixed assets are shown at cost less depreciation (not at what they would fetch in a forced sale), and why prepaid expenses are shown as assets. If closure is certain, the assumption fails and assets are shown at realisable value.
• Accounting (business) entity: the business is separate from its owner. Only business transactions are recorded; the owner's personal spending is drawings. Capital is a liability of the business to the owner.
• Money measurement: only transactions that can be expressed in money are recorded. A strike threat, the skill of a manager or a quarrel among staff, however important, is not recorded. Quantities (kg, units) are recorded only alongside money values.

Worked example

Suppose the owner of Lotus Garments pays his house rent of ₹20,000 from the business bank account, and a skilled tailor resigns. How does the accountant treat each, and which concepts apply? [2 marks]

Try it first, then show the solutionSolution

1. House rent is the owner's personal expense: under the entity concept it is drawings, not business rent.
2. The tailor's resignation cannot be measured in money, so under money measurement it is not recorded.

Answer: ₹20,000 debited to Drawings (entity concept); the resignation is not recorded (money measurement concept).

Accounting period, timeliness and complete disclosure

• Accounting period: the life of a business is split into equal intervals, usually one year (in India, 1st April to 31st March), so that results can be measured and compared, taxes paid and owners informed. Interim periods (quarter, half-year) are also used.
• Timeliness: information is useful only if it reaches users in time to affect their decisions. A perfect balance sheet published two years late is of little use.
• Complete (full) disclosure: financial statements must reveal all material information, in the statements or in notes: contingent liabilities, the method of depreciation and stock valuation, changes in policy, and events after the balance sheet date. Company law prescribes formats partly to secure disclosure.

Worked example

Suppose Delta Ltd. has a court case against it for ₹15 lakh which it expects to lose, but omits any mention of it to keep the balance sheet looking strong. Which concept is violated and how should it be shown? [2 marks]

Try it first, then show the solutionSolution

1. Lenders and investors would decide differently if they knew of the claim, so it is material information.
2. Hiding it violates the complete disclosure concept; it should at least appear as a contingent liability in the notes (or as a provision if a loss is probable).

Answer: Complete (full) disclosure is violated; disclose the claim in the notes as a contingent liability (or provide for it if the loss is probable).

Revenue recognition, accrual and matching

• Revenue recognition (realisation): revenue is recorded when it is earned, i.e. when goods are delivered or services rendered and the buyer is legally liable to pay, not when cash is received. An order received is not revenue; advance money received is a liability (income received in advance).
• Accrual: all revenues and expenses of the period are recorded when they arise, whether or not cash has moved. This gives outstanding expenses, prepaid expenses, accrued income and income received in advance.
• Matching: the expenses incurred to earn the revenue of a period are charged in the same period as that revenue. Closing stock is carried forward because its cost will match next year's sales; depreciation spreads the cost of a machine over the years it helps to earn revenue.

Worked example

Suppose Kiran Agencies sold goods worth ₹12,00,000 in March 2026, on which salesmen's commission of 5% will be paid in April 2026. The books close on 31st March 2026. In which year is the commission charged and why? [2 marks]

Try it first, then show the solutionSolution

1. Commission = 5% of 12,00,000 = ₹60,000.
2. It was incurred to earn the March 2026 sales, so under the matching (and accrual) concept it is charged in 2025-26 as an outstanding expense, though paid in April.

Answer: ₹60,000 is charged in 2025-26 as outstanding commission (matching and accrual concepts).

Historical cost, verifiable objective and dual aspect

• Historical cost: an asset is recorded at the price actually paid for it (including costs to bring it into use: freight, installation), and this cost is the basis for later accounting. A rise in market value is not recorded.
• Verifiable objective (objectivity): entries must rest on objective evidence, such as invoices, receipts and agreements, that any two independent people would agree on, not on personal opinion. Historical cost satisfies this; a guess at market value does not.
• Dual aspect: every transaction has two aspects, a debit and a credit, of equal amount. This is the basis of double entry and of the accounting equation Assets = Liabilities + Capital.

Worked example

Suppose Rana starts a business with cash ₹5,00,000, buys a plot for ₹3,00,000 in cash (registration ₹20,000 extra) and then goods of ₹1,50,000 on credit. The plot's market value rises to ₹4,50,000 by year-end. Show the accounting equation and the value of the plot. [3 marks]

Try it first, then show the solutionSolution

1. Plot at historical cost = 3,00,000 + 20,000 = ₹3,20,000; the market value of ₹4,50,000 is ignored.
2. Cash = 5,00,000 − 3,20,000 = ₹1,80,000; stock = ₹1,50,000.
3. Assets = 1,80,000 + 3,20,000 + 1,50,000 = ₹6,50,000 = Creditors 1,50,000 + Capital 5,00,000.

Answer: Plot ₹3,20,000 (historical cost); Assets ₹6,50,000 = Liabilities ₹1,50,000 + Capital ₹5,00,000 (dual aspect).

Prudence, consistency and materiality

• Prudence (conservatism): anticipate no profit, but provide for all possible losses. Hence stock is valued at cost or net realisable value, whichever is lower; provision is made for doubtful debts but not for expected gains. Prudence must not become deliberate understatement (secret reserves).
• Consistency: the same accounting methods (depreciation method, stock valuation) are used year after year, so results can be compared. A change is allowed only for a good reason (law, standard, better presentation) and its effect must be disclosed.
• Materiality: an item is material if knowing it would influence the decisions of users. Immaterial items may be treated in the simplest way: a stapler costing ₹250 is written off as an expense though it lasts years. Materiality depends on the size of the business and the nature of the item.

Worked example

Suppose the closing stock of Nova Electronics has two lots: televisions costing ₹2,40,000 with net realisable value ₹2,10,000, and speakers costing ₹80,000 with net realisable value ₹95,000. Value the closing stock and name the concept. [2 marks]

Try it first, then show the solutionSolution

1. Televisions: lower of 2,40,000 and 2,10,000 = ₹2,10,000 (loss provided).
2. Speakers: lower of 80,000 and 95,000 = ₹80,000 (unrealised gain ignored).
3. Closing stock = 2,10,000 + 80,000 = ₹2,90,000.

Answer: Closing stock ₹2,90,000, item by item at cost or net realisable value, whichever is lower (prudence).

Industry practice and substance over legal form

• Industry practice: some industries follow established practices that differ from the general rules, and these are accepted. Examples: banks and insurers have special formats prescribed by law; plantations value stock of tea at market price; construction firms recognise contract revenue stage by stage.
• Substance over legal form: transactions are recorded according to their economic reality, not merely their legal shape. An asset bought on hire purchase is shown as the buyer's asset from the start (with the unpaid instalments as a liability), although legal ownership passes only with the last instalment.

Worked example

Suppose Swift Couriers buys a van on hire purchase for ₹9,00,000, paying ₹2,00,000 down and the rest in instalments; legal ownership passes only after the last instalment. How is the van shown in Swift's balance sheet on the day of purchase? [2 marks]

Try it first, then show the solutionSolution

1. In substance Swift controls and uses the van, bearing its risks and rewards.
2. So the van is shown as Swift's asset at ₹9,00,000 and the unpaid ₹7,00,000 as a hire purchase liability.

Answer: Van ₹9,00,000 as an asset; hire purchase creditor ₹7,00,000 as a liability (substance over legal form).

Cash basis and accrual basis of accounting

Basis	Cash basis	Accrual basis
What is recorded	Only cash received and cash paid	Revenue when earned, expenses when incurred
Outstanding/prepaid items	Ignored	Recorded
Profit shown	Excess of receipts over payments	True profit of the period
Users	Doctors, lawyers, small professionals; government cash accounts	Companies (required by company law), most businesses
Matching	Not possible	Follows matching
Manipulation	Easy (delay payment to raise profit)	Harder

To move from accrual profit to cash-basis profit, remove the items that have not moved in cash this year and add the cash that relates to other years.

Worked example

Suppose Asha Consultants earned fees of ₹9,60,000 in 2025-26, of which ₹1,20,000 is still receivable; it also received ₹40,000 in advance for 2026-27 and ₹30,000 owed from 2024-25. Expenses incurred were ₹5,40,000, of which ₹45,000 is outstanding; it prepaid ₹18,000 for 2026-27 and paid ₹25,000 outstanding from 2024-25. Find profit on the accrual and cash bases. [3 marks]

Try it first, then show the solutionSolution

1. Accrual basis: 9,60,000 − 5,40,000 = ₹4,20,000.
2. Cash received = (9,60,000 − 1,20,000) + 40,000 + 30,000 = ₹9,10,000. Cash paid = (5,40,000 − 45,000) + 18,000 + 25,000 = ₹5,38,000.
3. Cash basis: 9,10,000 − 5,38,000 = ₹3,72,000.

Answer: Accrual basis ₹4,20,000; cash basis ₹3,72,000.

Accounting standards and IFRS

Accounting standards are written statements of accounting rules issued by an authoritative expert body, covering recognition, measurement, presentation and disclosure of transactions. In India they are framed by the Institute of Chartered Accountants of India (ICAI) through its Accounting Standards Board and notified by the central government; companies now follow Ind AS, converged with IFRS.

Utility (advantages): uniformity of accounting practice; comparability between firms and years; reliability and credibility of statements; less scope for manipulation and fraud; help to auditors; easier legal compliance and settlement of disputes.

Limitations: rigid rules may not suit every firm; choice among alternatives remains; standards cannot override the law.

IFRS (International Financial Reporting Standards): standards issued by the International Accounting Standards Board (IASB), London, so that financial statements are prepared on a common global basis. Benefits: companies listed in several countries need only one set of statements, investors can compare across countries, and foreign capital flows more easily. IFRS emphasise fair value and substance over form.

Worked example

Suppose an investor wants to compare an Indian software company with one in Germany. Why would IFRS-based (or IFRS-converged) statements help her? Give two reasons. [2 marks]

Try it first, then show the solutionSolution

1. Both sets of statements would follow the same recognition and measurement rules, so profits and assets are measured alike.
2. Presentation and disclosures would be similar, so she need not convert one set to the other's rules before comparing.

Answer: Common rules make figures comparable, and common formats and disclosures save conversion and raise confidence.

Accounting Concepts in real life

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

Topics in this chapter

• Accrual, Matching, Prudence, Consistency and Materiality
• Basic Accounting Assumptions: Entity, Going Concern, Money Measurement and Dual Aspect

Accounting Concepts: key facts

Accounting equation (dual aspect)

Assets = Liabilities + Capital

Every transaction keeps the two sides equal.

Stock valuation (prudence)

Closing stock = Cost or net realisable value, whichever is lower

Net realisable value = expected selling price − costs to sell.

Cash-basis profit

Cash-basis profit = Cash received during the year − Cash paid during the year (revenue items)

Includes amounts for other years; ignores amounts not yet received or paid.

Accrual-basis profit

Accrual profit = Revenue earned in the year − Expenses incurred in the year

Outstanding and accrued items included; advances excluded.

Accounting Concepts: diagrams to practise

Practise each one on paper: draw it from the checklist, then tick off every label.

How the school exam asks Accounting Concepts

The question patterns to expect, and the method that works for each.

Tricks to remember Accounting Concepts

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

• Prudence in five words

  "Losses now, profits when earned."

  Use it when: Stock valuation and provisions.

• Five questions for 17 concepts

  WHAT to record, WHEN, at what VALUE, HOW, and how MUCH to show. Hang every concept on one question.

  Use it when: Listing GAAP.

• Cash basis vs accrual: 'wallet' vs 'work'

  Cash basis follows the wallet (money moved); accrual follows the work (revenue earned, expense incurred).

  Use it when: Telling the bases apart and converting profit.

Accounting Concepts: exam-level solved questions

Ordered from exam level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section A style)

Read the situation, then answer every part. In a school exam set on the board pattern this is a 6-mark question split into 1 + 2 + 2 + 1 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Accounting Concepts

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

• ✗Mistake: Writing 'conservatism means understating profit'

  Prudence asks you to provide for probable losses, not to hide profit. Deliberate understatement creates secret reserves and violates full disclosure.

  ✓Do this: Write: 'anticipate no profit, but provide for all possible losses', and give the stock example.

  Usually costs: 1 mark.

• ✗Mistake: Treating an advance received as revenue

  Revenue is recognised when goods are delivered or services rendered. An advance is a liability until then.

  Wrong working

  Sales include ₹30,000 advance for May delivery.

  Right working

  ₹30,000 shown as income received in advance (liability); sales exclude it.

  ✓Do this: Ask: has the business done its part? If not, it is not revenue.

  Usually costs: 1-2 marks.

• ✗Mistake: Comparing totals instead of item by item for stock

  Comparing totals lets an unrealised gain on one item hide a loss on another, which prudence does not allow.

  ✓Do this: Take the lower of cost and NRV for each item, then add.

  Usually costs: 1 mark.

• ✗Mistake: Mixing up matching and accrual

  Accrual is about recording when earned or incurred; matching is about charging the expenses of a revenue in the same period as that revenue. Answers that write one definition for both lose the distinction.

  ✓Do this: Accrual: 'when it happens, not when cash moves'. Matching: 'expenses go with the revenue they helped earn'.

  Usually costs: 1 mark.

• ✗Mistake: Forgetting the cash for other years when converting to cash basis

  Cash basis records all cash moved in the year, including arrears of last year and advances for next year.

  ✓Do this: Cash received = earned − still receivable + arrears collected + advances received.

  Usually costs: 1-2 marks.

Practice questions on Accounting Concepts

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

1. Q1 · 1 mark · MCQExam level

   Which concept requires that the owner's personal expenses paid by the business be treated as drawings?
   (a) Money measurement
   (b) Business entity
   (c) Going concern
   (d) Accounting period

   Hint

   Owner and business are separate.

   Answer

   (b) Business entity.

2. Q2 · 2 marks · Short answerExam level

   State the meaning of the dual aspect concept with one example.

   Hint

   Two sides, equal amount.

   Answer

   Every transaction affects two accounts by equal amounts (a debit and a credit), so Assets = Liabilities + Capital always holds. E.g. buying furniture for ₹20,000 cash raises furniture by ₹20,000 and lowers cash by ₹20,000.

3. Q3 · 2 marks · Short answerExam level

   What is IFRS and which body issues it?

   Hint

   London-based board.

   Answer

   International Financial Reporting Standards: a single set of global accounting standards, issued by the International Accounting Standards Board (IASB), so that financial statements are comparable across countries.

4. Q4 · 3 marks · Short answerHarder exam level

   Suppose a firm's accrual profit is ₹2,40,000. Outstanding salaries at the year-end ₹18,000; accrued interest ₹6,000; prepaid rent ₹9,000; income received in advance ₹12,000. Find cash-basis profit, assuming no opening outstanding or prepaid items.

   Hint

   Which items raise cash profit and which lower it?

   Answer

   Cash profit = 2,40,000 + 18,000 (salary not paid) − 6,000 (interest not received) − 9,000 (rent paid for next year) + 12,000 (cash received in advance) = ₹2,55,000.

5. Q5 · 2 marks · Short answerHarder exam level

   Suppose a firm values its stock at cost in one year and at market price the next because market prices have risen. Which concepts does this violate? Explain briefly.

   Hint

   Two concepts.

   Answer

   Consistency (method changed without good reason, so profits are not comparable) and prudence (an unrealised gain is recognised by valuing above cost).

6. Q6 · 3 marks · Short answerHarder exam level

   Distinguish between the cash basis and the accrual basis of accounting on three bases.

   Hint

   Recording, outstanding items, legal acceptance.

   Answer

   Recording: cash basis records only when cash moves; accrual when revenue is earned and expense incurred. Outstanding and prepaid items: ignored vs recorded. Use: small professionals vs companies (required by company law); accrual shows the true profit and allows matching.

7. Q7 · 2 marks · Short answerHarder exam level

   Suppose a machine bought for ₹5,00,000 on 1st April 2025 is depreciated at 10% a year. On 31st March 2026 its market value is ₹5,60,000. At what amount is it shown, and which two concepts justify this?

   Hint

   Cost less depreciation.

   Answer

   5,00,000 − 50,000 = ₹4,50,000. Historical cost (market value ignored) and going concern (held for use, not sale).

8. Q8 · 3 marks · Short answerHOTS / competency

   Suppose a company is certain to close down in three months and sell all its assets. Should it still show machinery at cost less depreciation? Justify.

   Hint

   Which assumption has failed?

   Answer

   No. The going concern assumption no longer holds, because the machinery will be sold, not used. It should be shown at its expected realisable (sale) value, and the expected loss recognised; full disclosure requires stating that the business is closing.

9. Q9 · 3 marks · Short answerHOTS / competency

   Suppose a firm with total assets of ₹50 lakh writes off a ₹1,200 printer stand as an expense, though it will last four years, while its auditor insists that a ₹12 lakh machine must be shown as an asset. Explain why both treatments are right with reference to one concept.

   Hint

   Size relative to the business.

   Answer

   Materiality: whether an item matters depends on its size and nature relative to the business. ₹1,200 cannot influence any user's decision, so the simplest treatment (expense) is fine. A ₹12 lakh machine is about a quarter of the firm's assets, so it is material and must be shown as an asset and depreciated.

10. Q10 · 3 marks · Short answerHOTS / competency

    Suppose goods costing ₹80,000 were sent to a customer on 28th March on 'sale or return' terms; the customer had not accepted them by 31st March. The firm treated them as sales of ₹1,00,000. Which concept is violated, and how much is the profit overstated?

    Hint

    Has the sale happened?

    Answer

    Revenue recognition: until the customer accepts, no sale has taken place. Sales are overstated by ₹1,00,000 and closing stock understated by ₹80,000 (goods are still the firm's), so profit is overstated by 1,00,000 − 80,000 = ₹20,000.

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. 1.Prudence in one line?Show answer

   Anticipate no profit, provide for all possible losses.

2. 2.Which concept keeps the owner's expenses out of profit?Show answer

   Business entity.

3. 3.Which concept is the basis of double entry?Show answer

   Dual aspect.

4. 4.Who issues IFRS?Show answer

   The International Accounting Standards Board (IASB).

5. 5.Hire purchase asset shown by the buyer: which concept?Show answer

   Substance over legal form.

6. 6.Stock at lower of cost or NRV: which concept?Show answer

   Prudence (conservatism).

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Going concern: business continues; assets at cost less depreciation.
• ☐Entity: owner separate; personal spending is drawings.
• ☐Money measurement: only money-measurable items recorded.
• ☐Revenue recognised when earned, not when cash comes.
• ☐Matching: expenses go with the revenue they helped earn.
• ☐Historical cost: recorded at price paid; market rises ignored.
• ☐Prudence: stock at lower of cost or NRV, item by item.
• ☐Consistency: same method every year; disclose any change.
• ☐Accrual basis gives true profit; cash basis records only cash moved.
• ☐Accounting standards bring uniformity; IFRS (IASB) make statements globally comparable.

Accounting Concepts: frequently asked questions