AccountsISC Class 11 · Accounting Concepts

Basic Accounting Assumptions and Concepts: ISC Class 11 Accounts

Updated 17 October 2026 · Fact-checked

Accounting concepts are the basic assumptions on which books are kept. The entity concept separates the business from its owner, going concern assumes the business will continue, money measurement records only items measurable in money, the period concept divides life into accounting years, historical cost records assets at purchase price, and dual aspect gives every transaction two equal effects.

Understand Basic Accounting Assumptions: Entity, Going Concern, Money Measurement and Dual Aspect

Accounting entity (business entity). The business is treated as separate from its owner. The owner's investment is a liability of the business (capital), and his personal expenses are drawings. Effect: personal transactions of the owner are kept out of the books.

Going concern. The business is assumed to continue for the foreseeable future with no plan to close or reduce operations. Because of it, fixed assets are shown at cost less depreciation and not at forced-sale value, and prepaid expenses are carried forward.

Money measurement. Only facts that can be expressed in money are recorded. Skill of staff or the owner's health is left out. Limitation: money changes in value with inflation, so figures of different years are not exactly comparable.

Accounting period. Life of the business is cut into equal periods (usually a year) so that profit can be found and reported to owners, tax authorities and lenders. Without it, profit would be known only on closure.

Historical (cost) concept. Assets are recorded at the price paid on purchase and later at cost less depreciation, not at market value. It is objective and verifiable, but ignores rise in market value.

Dual aspect. Every transaction has two effects of equal amount: a debit and a credit. This gives the equation Assets = Capital + Liabilities and is the base of double entry.

Verifiable objective evidence. Records should rest on documents so that two accountants reach the same figure.

Clash between concepts. Historical cost is chosen over market value for objectivity, and going concern justifies keeping it.

Basic Accounting Assumptions: Entity, Going Concern, Money Measurement and Dual Aspect: key facts

Accounting equation: Assets = Capital + Liabilities | Capital = Assets - Liabilities; Follows from dual aspect.
Book value: Book value = Cost - Accumulated depreciation | Not the market value; Historical cost concept.
Concepts and their effect: Entity owner separate
Going concern continuing
Money measurable only
Period yearly profit; Quick map.

Entity	owner separate
Going concern	continuing
Money	measurable only
Period	yearly profit

How to answer Basic Accounting Assumptions: Entity, Going Concern, Money Measurement and Dual Aspect questions

Concept questions are asked as "which concept is followed" or "explain with an example".

1Read the situation and find what is being separated, assumed or measured.
2Name the concept and define it in one line.
3Link the facts of the question to the definition.
4If asked, state one advantage and one limitation.

Basic Accounting Assumptions: Entity, Going Concern, Money Measurement and Dual Aspect 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.

Entity concept

Suppose a shopkeeper pays Rs 6,000 of his child's school fees from the shop's cash box.

How will the books of the shop show this?

Try it first, then show the solutionSolution

The shop is separate from the shopkeeper, so the fees are not a business expense.
The cash leaving the business for personal use is drawings.

Answer: Debit Drawings, credit Cash Rs 6,000.

Memory hook: Owner's pocket is not the business till.

Tricks to remember Basic Accounting Assumptions: Entity, Going Concern, Money Measurement and Dual Aspect

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

E-G-M-P-H-D
Entity, Going concern, Money measurement, Period, Historical cost, Dual aspect.
Use it when: List of concepts.
Going = keeps going
Going concern means no liquidation; assets stay at cost less depreciation.
Use it when: Reasoning.
Two sides always
Dual aspect: each transaction touches two accounts equally.
Use it when: Double entry.

Basic Accounting Assumptions: Entity, Going Concern, Money Measurement and Dual Aspect: solved examples

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

Example 1: Name the concept · 1 mark · MCQBoard level

A machine bought for Rs 2,00,000 now has a market price of Rs 3,00,000 but is shown at Rs 1,60,000 (cost less depreciation). Which concept is followed?
(a) Going concern (b) Historical cost (c) Prudence (d) Entity

Try it first, then show the solutionSolution

Asset valued on its purchase cost, not market price.

Answer: (b) Historical cost

Example 2: Entity concept in action · 3 marks · Short answerBoard level

The proprietor took goods costing Rs 8,000 for his home and paid his electricity bill Rs 1,500 from business cash. State which concept applies and the treatment. (3 marks)

Try it first, then show the solutionSolution

Business is separate from the owner: entity concept.
Both items are personal: goods and cash drawn by the owner are drawings of Rs 8,000 + 1,500 = Rs 9,500.
Capital is reduced by Rs 9,500; no expense in Profit and Loss.

Answer: Entity concept; drawings Rs 9,500 reduce capital.

Example 3: Going concern and depreciation · 4 marks · Short answerHarder board level

A firm bought machinery for Rs 5,00,000. It plans to continue for many years. At the end of year 1 the machinery could be sold only for Rs 3,50,000 under forced sale. Annual depreciation is Rs 50,000. At what amount will it appear and why? (4 marks)

Try it first, then show the solutionSolution

Going concern: the firm will keep using, not sell, the machine.
Book value = 5,00,000 - 50,000 = Rs 4,50,000.
Historical cost less depreciation applies, not forced sale value.

Answer: Rs 4,50,000, because of the going concern and historical cost concepts.

Example 4: Dual aspect check · 6 marks · Long answerHarder board level

Show the two aspects of: (i) purchase of furniture for Rs 30,000 for cash; (ii) purchase of goods Rs 20,000 on credit; (iii) the owner introduces Rs 1,00,000 cash. Prove that Assets = Capital + Liabilities remains true if before them assets were Rs 3,00,000, capital Rs 2,00,000 and liabilities Rs 1,00,000. (6 marks)

Try it first, then show the solutionSolution

(i) Furniture +30,000, cash -30,000: assets unchanged at 3,00,000.
(ii) Stock +20,000, creditors +20,000: assets 3,20,000, liabilities 1,20,000.
(iii) Cash +1,00,000, capital +1,00,000: assets 4,20,000, capital 3,00,000.
Final: 4,20,000 = 3,00,000 + 1,20,000.

Answer: Assets Rs 4,20,000 = Capital Rs 3,00,000 + Liabilities Rs 1,20,000; each transaction had two equal effects.

Example 5: Concept limitation · 4 marks · Short answerHOTS / competency

A company is valuable largely because of its skilled team, brand loyalty and a loyal customer base. Explain with two concepts why its balance sheet may not show this value, and one consequence for a reader. (4 marks)

Try it first, then show the solutionSolution

Money measurement: team skill and loyalty are not measurable in money.
Historical cost: only amounts actually paid are recorded.
A reader should not treat the balance sheet as the true value of the business.

Answer: Money measurement and historical cost leave out such value; the balance sheet may understate the worth of the business.

Where students lose marks in Basic Accounting Assumptions: Entity, Going Concern, Money Measurement and Dual Aspect

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

Mistake: Naming the concept without applying it
Memory of the list only.
Wrong working
This is the entity concept.
Right working
This is the entity concept: the business is separate, so Rs 9,500 is drawings
Do this: Link facts with the definition.
Usually costs: 1-2 marks.
Mistake: Showing fixed assets at market value
Looks more realistic.
Wrong working
Machinery shown at Rs 3,00,000
Right working
Machinery shown at cost less depreciation
Do this: Use historical cost and going concern.
Usually costs: 1-2 marks.
Mistake: Putting owner's expenses to Profit and Loss
Cash left the business.
Wrong working
Debit Electricity expense Rs 1,500 (home bill)
Right working
Debit Drawings Rs 1,500
Do this: Personal spending is drawings.
Usually costs: 1-2 marks.

Exam tips

Always give an example of each concept, as the board marks examples.
Mention one limitation of money measurement: no inflation adjustment.
Do not mix the going concern and accounting period concepts.

Practice questions on Basic Accounting Assumptions: Entity, Going Concern, Money Measurement and Dual Aspect

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
The concept that every transaction has two effects is:
(a) money measurement (b) dual aspect (c) period (d) entity
Hint
Debit and credit.
Answer
(b) dual aspect
Q2 · 3 marks · Short answerBoard level
Explain the going concern concept and state any two accounting treatments that depend on it. (3 marks)
Hint
Continuing business.
Answer
The business is assumed to continue for the foreseeable future. Fixed assets are shown at cost less depreciation, and prepaid expenses are carried forward as assets.
Q3 · 4 marks · Short answerHarder board level
A trader bought a building for Rs 12,00,000 and charged depreciation Rs 60,000 for each of 3 years. Its market value is Rs 20,00,000. At what amount will it appear in the balance sheet after 3 years? Name two concepts that support this. (4 marks)
Hint
Book value.
Answer
Rs 12,00,000 - 3 x 60,000 = Rs 10,20,000. Historical cost and going concern.
Q4 · 6 marks · Long answerHarder board level
Before certain transactions, assets are Rs 6,00,000 and liabilities Rs 1,50,000. Then (i) goods Rs 40,000 are bought on credit, (ii) Rs 25,000 of a loan is repaid in cash, (iii) the owner withdraws Rs 10,000 cash. Find the new total assets, liabilities and capital. (6 marks)
Hint
Capital before = 4,50,000.
Answer
(i) Assets 6,40,000; liabilities 1,90,000. (ii) Assets 6,15,000; liabilities 1,65,000. (iii) Assets 6,05,000; capital 4,50,000 - 10,000 = 4,40,000. Final: 6,05,000 = 4,40,000 + 1,65,000.
Q5 · 3 marks · Short answerHOTS / competency
A proprietor argues: "The accounting period concept is unnecessary; we can wait until the business closes to find profit." Evaluate in 3 points. (3 marks)
Hint
Users and decisions.
Answer
Owners need timely profit for decisions, taxes are due every year, and lenders need regular statements; waiting until closure delays correction and distribution of profit.

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.What does the entity concept separate?Show answer
The business from its owner.
2.Fixed assets are shown at?Show answer
Cost less depreciation.
3.Limitation of money measurement?Show answer
Non-money facts are left out and money value changes.
4.Basis of double entry?Show answer
The dual aspect concept.
5.Which concept divides life into years?Show answer
Accounting period.

Basic Accounting Assumptions: Entity, Going Concern, Money Measurement and Dual Aspect: frequently asked questions

Is capital a liability?

Yes, an internal liability owed to the owner.

Does going concern forbid sale of assets?

No, it only assumes no planned closure.

Can historical cost be revised?

Only by depreciation; market value is not used.

Why verifiable evidence?

So that accounts are objective and reliable.