Accounting concepts & conventions, made dead simple.

What are accounting concepts and conventions?

Accounting concepts and conventions are the basic ground rules and customary practices that tell an accountant when and how much to record — not just what to record. Debit and credit tell you the mechanics of an entry; concepts and conventions tell you the judgement calls behind it: should this be an expense this year or next, should we book a possible gain, is this even worth disclosing separately?

They exist so that financial statements are trustworthy and comparable — a bank manager, a GST officer, an investor and your CA should all be able to read the same balance sheet and trust the same story, whichever accountant prepared it and whichever year it's for. TatvaBooks is built on exactly these rules, so the software applies them for you every time you post a voucher.

The seven concepts & conventions, in one table

These are the seven every commerce student is expected to know cold — one-line meaning and a real example for each.

Notice the pattern: going concern, accrual and matching are near-universal assumptions baked into how double-entry works — see the accounting equation and double-entry system. Consistency, prudence and materiality lean more on judgement — they guide how an accountant applies the rules, period after period.

The theory, one idea at a time

• Going concern — Unless there's clear evidence otherwise (like a shutdown decision), we assume the business will run indefinitely. This is why assets are shown at cost less depreciation, not at what they'd fetch in a forced, distress sale.
• Accrual — Income is recorded when earned (the sale happens), and expense when incurred (the benefit is consumed) — regardless of when cash is received or paid. This is the opposite of "cash basis" accounting, and it's what Indian companies and most GST-registered businesses are required to follow.
• Matching — Once accrual tells you which period a transaction belongs to, matching says: pair the expense with the revenue it produced, in that same period. Cost of goods sold in the month of the sale, not the month of purchase; salary for March in March, even if paid on 3-Apr.
• Consistency — Don't switch methods (say, depreciation method or stock valuation method) every year just because it flatters this year's profit. If you must change, disclose the change and its rupee impact — comparability across years is the whole point of financial statements.
• Prudence / conservatism — "Anticipate no profit, provide for all probable losses." A likely bad debt gets a provision today; a likely gain waits until it's actually realised. This stops businesses from overstating how healthy they are.
• Materiality — Time and effort should go where it changes a reader's decision. A ₹300 stapler doesn't need five years of depreciation tracking; a ₹5,00,000 machine does. What counts as "material" scales with the size of the business.
• Money measurement — Books only record what can be reliably expressed in rupees. Staff morale, brand reputation or a founder's network are real value-drivers, but they stay out of the ledger because they can't be objectively measured in money.

Live worked example — one trader, five decisions, real rupees

Priya runs a small trading business. In March 2026 she makes five decisions. Watch how each concept or convention decides the accounting treatment — and how the resulting journal entries still keep debits equal to credits.

The journal entries for March 2026

Here is how those five decisions actually get posted. All figures in ₹ — check that total debits equal total credits at the bottom.

Debits ₹2,25,400 = Credits ₹2,25,400. Five very different judgement calls — timing of income, timing of expense, caution on losses, and where to draw the line on detail — and every one of them still resolves into a perfectly balanced double entry. That's what these rules are for: they guide the decision, and double entry (see journal entries) records the result.

Common mistakes & student tips

• Confusing accrual with matching. Accrual decides when a transaction is recorded (event, not cash). Matching decides which period's expense it should sit against. They usually point the same way, but they answer different questions — examiners test this distinction directly.
• Treating prudence as "always show less profit." Prudence is about not booking uncertain gains and not skipping probable losses — it isn't a licence to create secret reserves or deliberately understate income, which is itself against the principle of true and fair presentation.
• Ignoring going concern in exam answers. If a question says a business is "closing down" or "being wound up," you must switch to net realisable (sale) values instead of cost — students often forget to flag this shift.
• Applying materiality without judgement. There's no fixed rupee cut-off in law — ₹5,000 might be material for a small shop and trivial for a large company. Always justify materiality relative to the size of the business in your answer.
• Forgetting money measurement excludes real value. Don't try to "record" things like employee skill or goodwill generated internally — only money measurement-compliant, reliably measurable transactions belong in the books.
• Tip — Indian number format. Write ₹1,20,000 (lakh grouping), not ₹120,000. Examiners in India expect the lakh/crore comma pattern.

In TatvaBooks, this happens automatically

On paper, applying accrual, matching and prudence correctly means remembering to pass provision and outstanding-expense entries by hand, every month-end, without fail. In TatvaBooks, sales and purchases post on an accrual basis by design — cash timing never distorts your profit and loss account — and every voucher is double-entry, so it can't save unless debits equal credits, keeping consistency built in period after period.

You still need to understand why a transaction is treated the way it is — that judgement is the CA's job. TatvaBooks makes sure the arithmetic behind that judgement is exact, every single time, without you having to remember a checklist at month-end.

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