Short Notes — Ch 3 Basic Accounting Concepts
⚡ Ch 3 — Basic Accounting Concepts
PYQ: 3 questions — 2022·Q105 · 2024·Q36 · 2024·Q51. ⭐ 2022·Q105 and 2024·Q36 are the SAME question (Money Measurement) — the most-repeated item in the whole paper. MCQ bank: 47 questions (Q28–44 · Q392–421) — the largest concept block in the bank.
1️⃣ Quick Revision Table — every concept in one line
| Concept | One-line meaning | 🔑 Trigger words in the question |
|---|---|---|
| Business Entity | business ≠ owner; capital is a liability of the business to the owner | "separate identity", "proprietor treated as creditor" |
| Money Measurement ⭐⭐ | only what can be measured in money is recorded | "human resources", "employee skill", "not recorded" |
| Going Concern | business will continue indefinitely; not liquidated soon | "will not be sold or liquidated", "foreseeable future" |
| Accounting Period | results reported at regular intervals (1 Apr – 31 Mar) | "span of time", "financial year" |
| Accrual ⭐ | record when it occurs, not when cash moves | "though not yet paid/received" |
| Cost / Historical Cost | assets recorded at purchase price (incl. transport + installation) | "original cost", "not market value" |
| Dual Aspect ⭐ | every transaction has two effects → A = L + C | "two-fold effect", "every debit has a credit" |
| Revenue Recognition (Realisation) | revenue counted when earned/realised, not when received | "credit sales are revenue on sale date" |
| Matching ⭐ | match expenses against the revenue of the same period | "Revenue − Expenses = Profit" |
| Consistency | same policy year after year so years are comparable | "unchanged from one period to another" |
| Conservatism (Prudence) | anticipate no profit, provide for all losses | "cost or realisable value, whichever is lower" |
| Materiality | ignore trivial items | "pens, pencils, files written off", "rounding to nearest 1,000" |
Going Concern · Consistency · Accrual If they are not followed, the fact must be disclosed. If the statements say nothing, these three are assumed to be followed. ⚠️ Trap: Business Entity is a concept, NOT a fundamental assumption (MCQ Q35).
2️⃣ Systems of Accounting
| Double Entry | Single Entry |
|---|---|
| Based on Dual Aspect | Incomplete — no two-fold effect |
| Every debit has a corresponding credit | Only personal accounts + cash book kept |
| Complete, scientific | Simple, flexible |
| Used by companies | ⭐ Used by small firms / sole traders |
3️⃣ Basis of Accounting
| Cash Basis | Accrual Basis |
|---|---|
| Record when cash is received/paid | Record when income/expense occurs |
| Dec rent paid in Jan → recorded in Jan | Dec rent paid in Jan → recorded in Dec |
| — | ⭐ The basis of modern accounting |
4️⃣ 🎯 PYQs from this chapter
⭐⭐ 2022 · Q105 ≡ 2024 · Q36 — asked in BOTH papers, identical
Which concept suggests the exclusion of human resources from the Balance Sheet? a) Accrual b) Money Measurement c) Going Concern d) Cost → Ans: B Employee skill/loyalty cannot be expressed in money → not recorded. This is also MCQ Q39. If you learn one fact from this chapter, learn this.
2024 · Q51 — Which entities generally keep books under the single entry system?
a) Joint stock companies b) Sole traders c) Government organisations d) Not-for-profit → Ans: B
5️⃣ Concept-spotting drill (the exam's favourite format)
The question describes a situation → you name the concept.
| Situation | Concept |
|---|---|
| Human resources not shown in Balance Sheet | Money Measurement |
| Business will not be liquidated soon | Going Concern |
| Proprietor treated as creditor for capital | Business Entity |
| Expenses matched with revenue | Matching |
| Policy unchanged year to year | Consistency |
| Anticipate no profit, provide for all losses | Conservatism |
| Pens/pencils written off in the year of purchase | Materiality |
| Sony rounds figures to nearest ₹1,000 | Materiality |
| Stock valued at cost or realisable value, whichever is lower | Conservatism |
| Asset recorded at ₹5,00,000 paid, not market value | Cost / Historical Cost |
| Service given in year A, fee received in year B → revenue in year A | Revenue Recognition |
| Asset costing ₹1,00,000 spread over 10 years | Matching |
| Every debit has an equal credit | Dual Aspect |
| Comparing this year's statements with last year's | Consistency |
6️⃣ High-frequency MCQ traps
| MCQ | Point |
|---|---|
| Q35 | Business Entity is NOT a fundamental assumption (the 3 are Going Concern, Consistency, Accrual) |
| Q36 | If nothing is stated → the 3 assumptions are assumed to be followed |
| Q37 | Proprietor as creditor → Business Entity |
| Q38 | Fixed assets are held for generating revenue (not resale) |
| Q42 | Matching concept = transactions recorded on accrual |
| Q43 | Assets 1,00,000 − Capital 40,000 → Liabilities = 60,000 |
| Q44 | Dual-aspect-based system = Double entry system |
| Q398 | Ignoring other principles when the amount is small = Materiality |
| Q399 | Consistency = same firm, same method, different years |
| Q400 | Historical cost = original cost |
| Q412 | Revenue − Expenses = Profit (Matching) |
| Q414 | Stock: cost or market price, whichever is lower |
| Q417 | "For every debit an equal credit" → Dual Aspect |
| Q421 | Cost concept recognises Historical cost |
7️⃣ If you remember nothing else
Money Measurement = human resources excluded (asked in both papers!) · 3 fundamental assumptions = Going Concern, Consistency, Accrual · Dual Aspect → A = L + C · Conservatism = no profit anticipated, all losses provided · Materiality = ignore trivial · Single entry = sole traders
🔗 Related
- Full notes: L-3-Basic Accounting Concepts · MCQs Q28–44, Q392–421 in MCQs
- Prev: SN-2-Basic-Accounting-Terms · Next: Ch 4 — Accounting Equation (pending your go-ahead)
