AccountsISC Class 11 · Accounting Concepts

Accrual, Matching, Prudence, Consistency and Materiality: ISC Class 11 Accounts

Updated 17 October 2026 · Fact-checked

Under the accrual basis, revenue is recorded when earned and expenses when incurred, whether or not cash moves. The matching concept sets the expenses of a period against the revenue of the same period. Prudence provides for all expected losses but not expected gains, consistency requires the same methods year after year, and materiality allows trivial items to be ignored.

Link each concept to its icon: calendar for accrual, scale for matching, shield for prudence, equal boxes for consistency, big coin versus tiny dot for material

Illustration drawn for QuestionBuddy.

Understand Accrual, Matching, Prudence, Consistency and Materiality

Revenue recognition. Revenue is recognised when it is earned, normally when goods are delivered or services rendered and the right to payment arises, not when cash comes in.

Accrual concept. Incomes and expenses are recorded for the period to which they belong, whenever cash is paid or received. Outstanding expenses and accrued income are added; prepaid expenses and income received in advance are deducted.

Matching concept. Expenses of a period are matched against the revenue of that same period to find a true profit. Cost of goods sold is matched with sales; depreciation is matched with the years in which the asset is used.

Cash basis vs accrual basis. Cash basis records only actual receipts and payments. Accrual basis records amounts due and owing. The accrual basis gives the better picture of profit and is used for final accounts.

Prudence (conservatism). Do not anticipate profit but provide for all possible losses. Stock is valued at cost or net realisable value, whichever is lower; a provision for doubtful debts is made; an unrealised gain is not recorded.

Consistency. The same accounting policy (for stock valuation, depreciation) is followed from year to year so that results of different years can be compared. A change is made only for a good reason and disclosed.

Materiality. Only items large enough to affect decisions need separate or exact treatment; very small items (a pencil) are charged to expense in full. What is material depends on the size of the business.

Substance over legal form. Transactions are recorded according to their economic reality. An asset taken on hire purchase is shown as an asset although ownership passes only on the last payment.

Industry practice. Special accounting treatment may be followed where the industry's nature demands it, such as insurance companies.

Accrual, Matching, Prudence, Consistency and Materiality: key facts

Accrual expense: Expense of the period = Paid + Closing outstanding - Opening outstanding - Closing prepaid + Opening prepaid | Opening balances adjusted
Accrual income: Income of the period = Received + Closing accrued - Opening accrued - Closing advance + Opening advance | Opening balances adjusted; Cash basis ignores this.
Stock valuation: Stock value = Lower of cost and net realisable value | Prudence concept; Never at a higher value.

How to answer Accrual, Matching, Prudence, Consistency and Materiality questions

Questions give cash figures and ask for accrual profit or ask which concept is violated.

1List actual receipts and payments.
2Adjust: add outstanding and accrued, subtract prepaid and advance.
3Compute revenue and expense on the accrual basis.
4State the concept that supports each adjustment.

Accrual, Matching, Prudence, Consistency and Materiality 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.

Prudence

Suppose a shopkeeper has goods that cost Rs 10,000 but, because the fashion has changed, can now be sold only for Rs 7,000, and a lucky customer might later pay Rs 4,000 extra for another item.

How should the shopkeeper treat the two cases?

Try it first, then show the solutionSolution

Possible loss: value the goods at the lower realisable value of Rs 7,000.
The Rs 4,000 extra gain is not certain, so it is not recorded.

Answer: Record the Rs 3,000 loss; do not record the possible gain.

Memory hook: Expect no profit, provide for every loss.

Tricks to remember Accrual, Matching, Prudence, Consistency and Materiality

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

Prudence = pessimist
Losses yes, gains wait.
Use it when: Prudence.
Match the period
Revenue of 2026 meets expenses of 2026.
Use it when: Matching.
Same method, same year-on-year
Consistency means comparability.
Use it when: Consistency.

Accrual, Matching, Prudence, Consistency and Materiality: solved examples

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

Example 1: Prudence · 1 mark · MCQBoard level

Stock costs Rs 50,000 and its net realisable value is Rs 42,000. Prudence requires it to be valued at:
(a) Rs 50,000 (b) Rs 42,000 (c) Rs 46,000 (d) Rs 8,000

Try it first, then show the solutionSolution

Lower of cost and net realisable value applies.

Answer: (b) Rs 42,000

Example 2: Cash versus accrual basis · 3 marks · Short answerBoard level

A school canteen records only the money it receives and pays. Explain, with two points, why its profit may differ from the accrual profit. (3 marks)

Try it first, then show the solutionSolution

Credit sales not yet paid are revenue on the accrual basis but are ignored on the cash basis.
Unpaid and prepaid expenses are adjusted under accrual but not under the cash basis, so expenses of the year differ.

Answer: Cash records only money moved, so it leaves out amounts due and owing and prepaid items; accrual adjusts them and gives the true profit of the period.

Example 3: Profit on cash and accrual basis · 6 marks · Long answerHarder board level

A trader received Rs 4,20,000 from customers in the year; sales for the year were Rs 5,00,000 (Rs 80,000 is due from customers). Cash expenses paid were Rs 3,00,000, which include Rs 20,000 paid in advance for next year; Rs 15,000 of expenses of this year are unpaid. Find profit under both bases. (6 marks)

Try it first, then show the solutionSolution

Cash basis: 4,20,000 - 3,00,000 = Rs 1,20,000.
Accrual expenses = 3,00,000 - 20,000 + 15,000 = Rs 2,95,000.
Accrual profit = 5,00,000 - 2,95,000 = Rs 2,05,000.
Difference 85,000 = 80,000 sales due + 20,000 prepaid - 15,000 unpaid.

Answer: Cash basis Rs 1,20,000; accrual basis Rs 2,05,000.

Example 4: Rent and interest on accrual basis · 5 marks · Long answerHarder board level

Rent paid in the year was Rs 66,000, which includes Rs 6,000 for the month after the year end, and Rs 10,000 of rent for the last month of the previous year (outstanding at the start) was paid within the year. Interest received was Rs 12,000, with Rs 3,000 pertaining to the next year, and Rs 2,000 of this year's interest is still due. Find rent expense and interest income for the year. (5 marks)

Try it first, then show the solutionSolution

Rent paid 66,000 less previous year's outstanding paid 10,000 = 56,000 for this year's cash, less prepaid 6,000 = Rs 50,000.
Interest income = 12,000 - 3,000 (advance) + 2,000 (due) = Rs 11,000.

Answer: Rent expense Rs 50,000; interest income Rs 11,000.

Example 5: Which concept is broken? · 4 marks · Short answerHOTS / competency

A firm valued stock by FIFO for five years, then switched to a method that raises profit this year, without disclosure. Also, it recorded the Rs 90,000 profit on a pending order as revenue. Name the concepts broken and justify the correct treatment. (4 marks)

Try it first, then show the solutionSolution

Switching stock method silently breaks consistency: results are no longer comparable.
Recording expected profit on an unfulfilled order breaks prudence and revenue recognition: revenue is earned on delivery.
Correct: continue the method or disclose the change and its effect; record revenue on delivery.

Answer: Consistency and prudence (with revenue recognition) are broken.

Where students lose marks in Accrual, Matching, Prudence, Consistency and Materiality

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

Mistake: Adding prepaid to expense
Direction confusion.
Wrong working
Expense = 3,00,000 + 20,000 + 15,000
Right working
Expense = 3,00,000 - 20,000 + 15,000
Do this: Prepaid is subtracted, outstanding added.
Usually costs: 2 marks.
Mistake: Mixing prudence with consistency
Both say "careful".
Wrong working
Same stock method each year is prudence
Right working
Same method each year is consistency
Do this: Link each rule to its keyword.
Usually costs: 1 mark.
Mistake: Recording expected gains
Optimism.
Wrong working
Profit of Rs 4,000 added to income
Right working
Not recorded until realised
Do this: Provide for losses, not gains.
Usually costs: 1 mark.

Exam tips

In accrual numericals show a mini table: paid, add outstanding, less prepaid.
Give one example for each concept.
Remember that materiality depends on the size and nature of the item.

Practice questions on Accrual, Matching, Prudence, Consistency and Materiality

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
Changing the method of depreciation every year violates the concept of:
(a) prudence (b) consistency (c) materiality (d) entity
Hint
Comparability.
Answer
(b) consistency
Q2 · 3 marks · Short answerBoard level
Explain the matching concept with an example. (3 marks)
Hint
Period.
Answer
Expenses of a period are set against the revenue of the same period. Example: salaries for March are charged in the year ending March even if paid in April, so the profit of the year is true.
Q3 · 5 marks · Long answerHarder board level
Salaries paid in the year were Rs 2,40,000, which includes Rs 20,000 for the previous year; Rs 30,000 for this year is still unpaid. Commission received Rs 18,000 includes Rs 4,000 for next year, and Rs 6,000 is accrued. Find salaries and commission for the year. (5 marks)
Hint
Remove the previous year's part.
Answer
Salaries = 2,40,000 - 20,000 + 30,000 = Rs 2,50,000. Commission = 18,000 - 4,000 + 6,000 = Rs 20,000.
Q4 · 5 marks · Long answerHarder board level
A shop had cash sales Rs 3,50,000 and credit sales Rs 1,50,000, of which Rs 90,000 was collected. Cash expenses paid were Rs 2,70,000, which include Rs 10,000 paid in advance for next year; a further Rs 25,000 of this year's expenses is outstanding. Find cash basis and accrual basis profit. (5 marks)
Hint
Cash receipts = 3,50,000 + 90,000.
Answer
Cash basis = 4,40,000 - 2,70,000 = Rs 1,70,000. Accrual: revenue 5,00,000; expenses 2,70,000 + 25,000 - 10,000 = 2,85,000; profit Rs 2,15,000.
Q5 · 3 marks · Short answerHOTS / competency
A small firm spends Rs 40 on a stapler lasting ten years and charges it fully to expense. Is this correct? Explain with the concept and a reverse case for a Rs 8,00,000 machine. (3 marks)
Hint
Materiality.
Answer
Yes: the amount is immaterial, so full expensing under materiality is acceptable. A Rs 8,00,000 machine is material and must be capitalised and depreciated over its 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.Revenue is recognised when?Show answer
When it is earned, not when cash is received.
2.Prudence on stock?Show answer
Lower of cost and net realisable value.
3.Accrual basis includes?Show answer
Outstanding and prepaid adjustments.
4.Consistency helps what?Show answer
Comparison of years.
5.Substance over form example?Show answer
Hire purchase asset shown as an asset.

Accrual, Matching, Prudence, Consistency and Materiality: frequently asked questions

Is accrual the same as matching?

Accrual decides when to record; matching sets expenses against the same period's revenue.

Can an accounting policy ever change?

Yes, with good reason and disclosure.

Is prudence a licence to understate?

No, only to avoid anticipating profit.

What is net realisable value?

Expected selling price less selling costs.