Why is "Giving a vague definition without applying the concept" a common mistake in The Accounting Concepts?

Why it happens: Memorising names but not meaning. How to avoid it: For each concept, learn a precise definition AND a concrete example; in 'explain' questions, link the concept to the specific treatment in the scenario. Source: 9706 Examiner Reports

Why is "Confusing prudence with matching" a common mistake in The Accounting Concepts?

Why it happens: Both affect year-end adjustments. How to avoid it: Matching = recognise income/expense in the right PERIOD (accruals/prepayments/depreciation). Prudence = CAUTION (don't overstate assets/profit — allowances, lower of cost and NRV). Source: 9706 Examiner Reports

Why is "Thinking revenue is recognised when cash is received" a common mistake in The Accounting Concepts?

Why it happens: Everyday view of a 'sale'. How to avoid it: Realisation recognises revenue when the SALE is made (goods/services delivered), even if the customer pays later (a credit sale). Source: 9706 Examiner Reports

Why is "Confusing going concern with consistency" a common mistake in The Accounting Concepts?

Why it happens: Both relate to continuity. How to avoid it: Going concern = the business will CONTINUE (so assets at cost, not break-up). Consistency = same POLICIES each year (comparability). Source: 9706 Examiner Reports

Why is "Recording the owner's private items in the business accounts" a common mistake in The Accounting Concepts?

Why it happens: Owner and business feel like one. How to avoid it: Business entity concept: only the business's transactions are recorded; the owner's private assets/spending are excluded (private use = drawings). Source: 9706 Examiner Reports

Why is "Treating a hire-purchase asset as not belonging to the buyer" a common mistake in The Accounting Concepts?

Why it happens: Legal ownership passes only at the end. How to avoid it: Substance over form: the buyer controls and uses the asset, so it is shown as their non-current asset with the amount owing as a liability. Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

The Accounting Concepts

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Detailed Study Notes

Detailed notes on The Accounting system for Cambridge International A Levels Accounting, covering key concepts, explanations, examples, and exam-focused revision points.

The Accounting Concepts — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

The rules that make financial statements consistent, comparable and reliable. Learn all twelve examinable concepts — business entity, historic cost, money measurement, going concern, consistency, prudence, realisation, duality, materiality, objectivity, matching/accruals and substance over form — with a precise definition and a real accounting example of each, so you can both define them and apply them.

At a glance

Concepts = the agreed rules underpinning how transactions are recorded and reported.
Matching/accruals: match income to the expenses incurred in earning it, in the period they relate to (not when cash moves).
Prudence: don't overstate assets/income or understate liabilities/expenses — recognise losses early, profits only when realised.
Going concern: assume the business will continue for the foreseeable future (so assets are not at break-up values).
Business entity: keep the owner's affairs separate from the business's.
Consistency: use the same policies each year so results are comparable.
Realisation: recognise revenue when the sale is made (goods/services delivered), not when cash is received.
Substance over form: record the economic reality, not just the legal form (e.g. assets bought on hire purchase).

What you’ll learn

Mapped to the Cambridge International A Level 9706 syllabus (2026-2028).

1.2.1 — Understand the accounting concepts underpinning the preparation of accounts: business entity, historic cost, money measurement, going concern, consistency, prudence, realisation, duality, materiality, objectivity, matching/accruals and substance over form.
Apply concepts to justify the treatment of transactions (e.g. depreciation, accruals, inventory valuation, irrecoverable debts).
Link 3.2.1 — concepts underpin the International Accounting Standards.

The twelve concepts at a glance

A precise definition and an example of each examinable concept.

Learn each concept with a one-line definition and a real example — questions ask you to both define and apply.

Concept	What it means	Example
Business entity	The business is separate from its owner	Owner's private car not in the business accounts
Money measurement	Only items measurable in money are recorded	Staff skill/morale not recorded
Historic cost	Assets recorded at their original cost	Machine shown at cost, not current market value
Going concern	The business will continue for the foreseeable future	Assets valued at cost, not break-up value
Consistency	Same accounting policies each period	Same depreciation method each year
Prudence	Don't overstate assets/income; recognise losses early	Allowance for irrecoverable debts; inventory at lower of cost and NRV
Realisation	Revenue recognised when earned (sale made)	Credit sale recorded when goods delivered, not when paid
Matching/accruals	Match income with the expenses of the same period	Accrue unpaid rent; carry prepayment forward
Duality	Every transaction has two effects	One debit and one credit
Materiality	Only significant items need separate/strict treatment	Cheap stapler expensed, not capitalised
Objectivity	Records based on verifiable evidence, free from bias	Figures supported by invoices/documents
Substance over form	Record economic reality, not just legal form	Asset on hire purchase shown as the buyer's asset

Tip: the four examiners test most are matching/accruals, prudence, going concern and consistency — know these in depth.

Twelve concepts: know a definition AND an example of each.
Most-tested: matching/accruals, prudence, going concern, consistency.
Concepts justify the treatment of adjustments and valuations.
They underpin the International Accounting Standards (3.2).

See the full worked example for the accounting concepts →

Matching/accruals and prudence in depth

The two concepts behind almost every year-end adjustment.

Matching (accruals) concept. Income and the expenses incurred in earning it should be recognised in the period they relate to, regardless of when cash is paid or received.

Accrued expense: an expense incurred but not yet paid is added to this year's expenses (and shown as a current liability).
Prepaid expense: an expense paid in advance is removed from this year's expenses (and shown as a current asset).
This is why depreciation spreads an asset's cost over the years that benefit from it.

Prudence concept. Exercise caution: do not overstate assets or income, and do not understate liabilities or expenses. Recognise losses as soon as they are foreseen, but profits only when realised.

Inventory is valued at the lower of cost and net realisable value.
An allowance for irrecoverable debts is created for doubtful receivables.

Where they can clash. If two treatments are possible, prudence usually wins (be cautious) — but the result must still fairly match income and expense. International standards lean on a balance of these ideas.

Matching: recognise income/expense in the period they relate to (accruals & prepayments).
Depreciation applies matching to non-current assets.
Prudence: don't overstate assets/income; recognise losses early.
Prudence drives inventory (lower of cost and NRV) and allowances for irrecoverable debts.

See the full worked example for the accounting concepts →

Going concern, consistency & substance over form

Three concepts that shape how statements are prepared and presented.

Going concern. Assume the business will continue operating for the foreseeable future. This justifies valuing assets at cost (less depreciation) rather than at break-up (forced-sale) values, and carrying prepayments/inventory forward. If a business is not a going concern, assets must be restated at what they would fetch on closure.

Consistency. Apply the same accounting policies from one period to the next (e.g. the same depreciation method). This makes results comparable over time. A policy can be changed if there is good reason, but the change and its effect should be disclosed.

Substance over form. Record the economic reality of a transaction rather than merely its legal form. The classic example is an asset bought on hire purchase: legally the buyer does not own it until the final payment, but in substance they control and use it, so it is shown as their non-current asset with the amount owing as a liability.

Going concern: business continues → assets at cost, not break-up value.
Consistency: same policies each year → comparable results.
Substance over form: record economic reality (e.g. HP asset = buyer's asset).
A policy change must have good reason and be disclosed.

The remaining concepts in depth

Money measurement, historic cost, realisation, duality, materiality and objectivity.

Beyond matching, prudence, going concern, consistency and substance over form, the syllabus expects you to apply six more:

Money measurement. Only items with a reliable money value are recorded. Valuable things like a skilled workforce, a loyal customer base or a strong brand are not recorded (unless purchased), which is a recognised limitation of financial statements.
Historic cost. Assets are recorded at original cost, not current market value. This is objective and verifiable, but in times of rising prices it can make asset values and profit look out of date (a limitation).
Realisation. Revenue is recognised when it is earned (goods/services delivered), not when the order is taken or the cash is received. A deposit received in advance is a liability, not yet revenue.
Duality. Every transaction has two effects, recorded as equal debit and credit — the basis of double entry and the trial balance.
Materiality. Only items significant enough to affect users' decisions need strict treatment; trivial items (e.g. an $8 bin) can be expensed rather than capitalised and depreciated.
Objectivity. Records should rest on verifiable evidence (invoices, statements) and be free from personal bias, which keeps estimates (like allowances) reasonable.

How they interact. Several concepts often apply to one item: an asset is recorded at historic cost (objective), depreciated under matching, written down under prudence if impaired, and only while the business is a going concern.

Money measurement: only money-valued items recorded (skills/brand excluded) — a limitation.
Historic cost: original cost, objective but can be out of date.
Realisation: revenue when earned/delivered, not when cash received.
Duality, materiality, objectivity complete the set; several concepts can apply to one item.

See the full worked example for the accounting concepts →

Why concepts matter: the true and fair view & IAS

Concepts make statements reliable and comparable, underpinning the International Accounting Standards.

The concepts are not arbitrary rules — they exist so that financial statements give a true and fair view and can be trusted and compared by users (links to 3.2).

Reliability: prudence, objectivity and money measurement keep figures cautious, evidence-based and measurable.
Comparability: consistency and historic cost let users compare a business over time and against others.
Relevance & fair presentation: matching, realisation and substance over form ensure each period's profit reflects what was really earned and incurred.

Link to International Accounting Standards (A Level, 3.2.1). The IAS build on these concepts — for example IAS 2 Inventories applies prudence (lower of cost and net realisable value); IAS 16 Property, Plant and Equipment applies historic cost and matching (depreciation); IAS 1 Presentation of Financial Statements assumes the going concern and accruals bases. So mastering the concepts here makes the A-Level standards far easier.

A* framing. When a question asks you to justify a treatment, the strongest answers name the concept, explain how it applies, and link it to giving a true and fair view — moving from AO1 recall into AO2/AO3 reasoning.

Concepts exist to give a true and fair view and enable trust/comparison.
Reliability (prudence, objectivity), comparability (consistency, historic cost), relevance (matching, realisation, substance).
IAS build on the concepts: IAS 2 (prudence), IAS 16 (cost + matching), IAS 1 (going concern + accruals).
Top answers link the concept to the true and fair view.

Quick recap

Concepts are the agreed rules making accounts consistent, comparable and reliable.
Matching/accruals: recognise income and expense in the period they relate to.
Prudence: don't overstate assets/income; recognise losses early (inventory at lower of cost and NRV, allowances).
Going concern: business continues → assets at cost, not break-up value.
Consistency: same policies each year for comparability.
Business entity, realisation, duality, materiality, objectivity, historic cost, money measurement, substance over form complete the twelve.

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

Matching/accruals: match income with the expenses of the same period (accruals & prepayments).
Prudence: do not overstate assets/income; recognise losses early, profits only when realised.
Going concern: assume the business continues → value assets at cost, not break-up value.
Consistency: same accounting policies each period for comparability.
Substance over form: record economic reality (e.g. hire-purchase asset as the buyer's asset).

How it’s examined

Tested across Paper 1, Paper 2 and Paper 3. Common tasks: Explain two accounting concepts that apply to [depreciation / inventory / accruals] (4 marks); Name the concept that justifies [a treatment] (1-2 marks); Explain how the prudence/matching concept affects the financial statements. Marking is point-based (definition + application). Examiner reports note vague definitions and failure to link the concept to the specific treatment in the question.

Sources: Cambridge International AS & A Level Accounting 9706 syllabus (2026-2028); 9706/22 Paper 2 question paper & mark scheme, Feb/Mar 2024 (Q2(e) — concepts applying to depreciation); 9706 Examiner Reports (Paper 1 & Paper 2), 2022-2024. Last reviewed 2026-06-17.

Take this whole topic with you

Step-by-step worked examples — The Accounting Concepts

Step-by-step solutions to past-paper-style questions on the accounting concepts, written exactly the way a tutor would explain them at the board.

Question type:

1Identify the concept (4 marks)
Getting startedIdentify & classify• 9706 Paper 1/2 style• concepts, AO1
Question
Name the concept that applies: (i) the owner's private holiday is not recorded in the business accounts; (ii) inventory is valued at the lower of cost and net realisable value; (iii) the same depreciation method is used each year; (iv) a credit sale is recorded when the goods are delivered. (4 marks)
Step-by-step solution
1. Step 1
  (i) Business entity.
2. Step 2
  (ii) Prudence.
3. Step 3
  (iii) Consistency.
4. Step 4
  (iv) Realisation (revenue recognition).
Answer
(i) Business entity; (ii) Prudence; (iii) Consistency; (iv) Realisation.
Examiner tip
Match the action to the concept. (ii) could also link to matching, but prudence is the primary justification for lower of cost and NRV.
2Apply the matching concept to an accrual (4 marks)
Getting startedWord problem• matching, AO2
Question
Rent of $300 for December has not yet been paid at the year end (31 December). Explain, using the matching concept, how this is treated. (4 marks)
Step-by-step solution
1. Step 1
  Matching requires the expense to be recognised in the period it relates to — December's rent belongs to this year.
2. Step 2
  So the $300 is added to the rent expense in the statement of profit or loss even though unpaid.
3. Step 3
  It is also shown as an accrued expense (current liability) in the statement of financial position.
Answer
Add $300 to this year's rent expense (matching) and show$ 300 as an accrual (current liability).
Examiner tip
Matching recognises expense when incurred, not when paid; the unpaid amount becomes a liability.
3Concept behind a treatment (5 marks)
Building confidenceIdentify & classify• concepts, AO2
Question
State the main concept that justifies each treatment: (i) charging depreciation on a machine; (ii) creating an allowance for irrecoverable debts; (iii) valuing non-current assets at cost less depreciation rather than break-up value; (iv) recording an asset bought on hire purchase as the buyer's asset; (v) supporting figures with invoices. (5 marks)
Step-by-step solution
1. Step 1
  (i) Matching (spread cost over useful life).
2. Step 2
  (ii) Prudence (recognise likely losses).
3. Step 3
  (iii) Going concern.
4. Step 4
  (iv) Substance over form.
5. Step 5
  (v) Objectivity.
Answer
(i) Matching; (ii) Prudence; (iii) Going concern; (iv) Substance over form; (v) Objectivity.
Examiner tip
Depreciation = matching; allowances/inventory caution = prudence; assets at cost = going concern; HP asset = substance over form.
4Inventory valuation and prudence (5 marks)
Building confidenceWord problem• prudence, inventory, AO2
Question
Inventory cost $8,000 but, because it is damaged, can now only be sold for$ 5,000 (net realisable value). State the value used and explain the concept applied. (5 marks)
Step-by-step solution
1. Step 1
  Inventory is valued at the lower of cost ($8,000) and net realisable value ($5,000) → $5,000.
2. Step 2
  This applies prudence: do not overstate assets or profit.
3. Step 3
  Recognising the $3,000 fall now (a foreseeable loss) prevents overstating inventory and profit.
Answer
Value at $5,000 (lower of cost and NRV) — applying prudence, recognising the foreseeable$ 3,000 loss.
Examiner tip
State both the rule (lower of cost and NRV) and the concept (prudence) for full marks.
5Going concern and asset values (6 marks)
StretchWord problem• going concern, AO3
Question
A business is preparing its statement of financial position. (a) Explain how the going concern concept affects the valuation of its non-current assets. (b) Explain how the valuation would change if the business were about to close down. (6 marks)
Step-by-step solution
1. Step 1
  (a) Going concern assumes the business will continue for the foreseeable future.
2. Step 2
  So non-current assets are valued at cost less accumulated depreciation (carrying value), reflecting continued use, not immediate sale.
3. Step 3
  (b) If the business were closing, the going concern assumption no longer holds.
4. Step 4
  Assets would be restated at their break-up / net realisable (forced-sale) values, which are usually lower.
5. Step 5
  This could significantly reduce the reported asset values and net assets.
6. Step 6
  So the same assets can be worth very different amounts depending on whether the going concern assumption applies.
Answer
(a) Going concern → assets at cost less depreciation (carrying value). (b) On closure, restate at break-up/NRV, usually lower, reducing net assets.
Examiner tip
Contrast carrying value (going concern) with break-up value (closure) — the heart of the concept.
6Consistency and comparability (5 marks)
StretchWord problem• consistency, AO3
Question
A business changes its depreciation method every year to make profits look higher. Explain which concept is breached and why this is a problem. (5 marks)
Step-by-step solution
1. Step 1
  The consistency concept is breached — the same policies should be used each period.
2. Step 2
  Changing the method yearly makes results not comparable from one year to the next.
3. Step 3
  Manipulating the method to inflate profit also breaches prudence/objectivity and gives a misleading view.
4. Step 4
  Users (lenders, owners) could be misled into wrong decisions.
5. Step 5
  A method should change only with good reason, with the change disclosed.
Answer
Breaches consistency (and prudence/objectivity); results become non-comparable and misleading; changes need good reason and disclosure.
Examiner tip
Name consistency, explain the loss of comparability, and note the disclosure requirement.
7Apply the materiality concept (4 marks)
Building confidenceWord problem• materiality, AO2
Question
A business buys a waste-paper bin for $8 (expected to last several years) and a delivery van for$ 25,000. Explain, using the materiality concept, why they are treated differently. (4 marks)
Step-by-step solution
1. Step 1
  Materiality says only items significant enough to affect users' decisions need strict treatment.
2. Step 2
  The van ($25,000) is material → it is capitalised as a non-current asset and depreciated over its life.
3. Step 3
  The bin ($8) is immaterial → although it lasts years, it is simply expensed immediately; capitalising and depreciating it would be pointless.
Answer
Van is material → capitalise and depreciate; bin is immaterial → expense it now. Materiality decides the treatment.
Examiner tip
Materiality justifies expensing low-value 'capital' items rather than capitalising them — a practical, common decision.
8Apply several concepts to one scenario (6 marks)
StretchIdentify & classify• 9706 Paper 3 style• concepts, comprehensive, AO2
Question
At its year end a business: (i) depreciates a machine (cost $20,000) over 5 years; (ii) owes wages of$ 1,000 not yet paid; (iii) holds inventory costing $4,000 that can now be sold for only$ 3,000; (iv) records the machine at its $20,000 cost. State and briefly justify the concept governing each treatment. (6 marks)
Step-by-step solution
1. Step 1
  (i) Depreciation over 5 years → matching — spread the cost over the periods that benefit from the machine.
2. Step 2
  (ii) Accrue $1,000 wages → matching (accruals) — recognise the expense in the period it relates to, even though unpaid.
3. Step 3
  (iii) Inventory at $3,000 (lower of cost and NRV) → prudence — do not overstate the asset or profit; recognise the foreseeable $1,000 loss.
4. Step 4
  (iv) Machine at $20,000 cost → historic cost (and going concern) — recorded at original cost on the assumption the business continues.
Answer
(i) Matching; (ii) Matching/accruals; (iii) Prudence; (iv) Historic cost / going concern.
Examiner tip
A single scenario often tests several concepts — name each AND link it to the specific treatment for full marks.
9Revenue recognition — deposit in advance (5 marks)
StretchWord problem• 9706 Paper 3 style• realisation, prudence, AO3
Question
In December a customer pays a $2,000 deposit for goods that will be delivered in January. Explain, using the relevant concepts, whether the$ 2,000 should be recognised as revenue in December. (5 marks)
Step-by-step solution
1. Step 1
  The realisation concept recognises revenue when it is earned — i.e. when the goods are delivered — not when cash is received.
2. Step 2
  In December the goods have not yet been delivered, so the revenue is not yet earned.
3. Step 3
  Prudence also says profit should not be recognised before it is realised.
4. Step 4
  So in December the $2,000 is shown as a liability (deferred income / received in advance), not revenue.
5. Step 5
  It is recognised as revenue in January, when the goods are delivered.
Answer
No — recognise it in January when the goods are delivered (realisation/prudence). In December it is deferred income (a liability).
Examiner tip
Cash received ≠ revenue earned. Realisation defers the income until the sale is performed.
10Resolving an apparent concept conflict (6 marks)
StretchWord problem• 9706 Paper 3 style• prudence, matching, objectivity, AO3
Question
Explain how the prudence and matching concepts both support creating an allowance for irrecoverable debts, and how the business avoids over-applying prudence. (6 marks)
Step-by-step solution
1. Step 1
  Matching requires the cost of likely bad debts to be charged in the same period as the credit sales that created the receivables.
2. Step 2
  Prudence requires that receivables and profit are not overstated, so a likely loss is recognised now via an allowance.
3. Step 3
  Here the two concepts agree — both justify creating the allowance in the period of sale.
4. Step 4
  However, an excessively large allowance would understate profit and assets — over-applying prudence.
5. Step 5
  The allowance should be a reasonable, evidence-based estimate (applying objectivity), neither overstating nor unduly understating.
6. Step 6
  So a balanced, justified estimate satisfies matching, prudence and objectivity together.
Answer
Matching charges the bad-debt cost in the period of sale; prudence recognises the likely loss now; a reasonable, evidence-based (objective) estimate avoids over-prudence.
Examiner tip
Strong A-Level answers recognise that prudence must not become deliberate understatement — objectivity keeps estimates reasonable.

Model Answers — The Accounting Concepts

High-scoring sample answers for the accounting concepts on the Cambridge IGCSE paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
9706 Paper 2 style2 marks
Q (2 marks). Define the prudence concept.
Model answer
Prudence means exercising caution so that assets and income are not overstated and liabilities and expenses are not understated. Losses are recognised as soon as they are foreseen, but profits are only recognised when realised.
Why this scores
Marking (point-based, 2). 1 mark for 'do not overstate assets/income', 1 for 'recognise losses early / profits only when realised'.
Question 2
9706 Paper 2 style4 marks
Q (4 marks). Name the accounting concept that applies to each: (a) depreciating a vehicle over its useful life; (b) valuing damaged inventory at net realisable value; (c) not recording the owner's private car; (d) using verifiable invoices as evidence.
Model answer
(a) Matching (accruals). (b) Prudence. (c) Business entity. (d) Objectivity.
Why this scores
Marking (point-based, 4). 1 mark each. (a) accept 'accruals/matching'; depreciation spreads cost over the periods that benefit.
Question 3
9706 Paper 2 style (mirrors 9706/22 Feb-Mar 2024 Q2(e))4 marks
Q (4 marks). Explain two accounting concepts which apply to the depreciation of non-current assets.
Model answer
1. Matching (accruals). A non-current asset is used over several years, so its cost is spread (as depreciation) over the periods that benefit from it, matching the cost to the revenue it helps to earn each year.

2. Prudence / consistency. Charging depreciation ensures the asset is not overstated in the statement of financial position (prudence); applying the same method each year keeps the figures comparable (consistency).
Why this scores
Marking (point-based, 4). ~2 marks per concept (name + how it applies to depreciation). Matching is the central one; prudence/consistency/going concern are also creditworthy.
Question 4
9706 Paper 2 style6 marks
Q (6 marks). At the year end, a business has paid $5,400 for insurance, of which$ 400 relates to next year, and owes $600 for electricity not yet paid. Explain, using the relevant concept, how each is treated in the financial statements.
Model answer
Both are governed by the matching (accruals) concept, which recognises expenses in the period they relate to.

**Insurance prepayment ( $400).** \$ 400 relates to next year, so it is removed from this year's insurance expense (charge = $5,400 − $400 = $5,000) and shown as a prepayment (current asset) in the statement of financial position.

**Electricity accrual ( $600).** \$ 600 of electricity has been incurred this year but not paid, so it is added to this year's electricity expense and shown as an accrual (current liability).
Why this scores
Marking (point-based, 6). Naming matching (1); prepayment removed → charge $5,000 + current asset (~2.5); accrual added → expense up + current liability (~2.5).
Question 5
9706 Paper 3 style6 marks
Q (6 marks). Explain the going concern concept and discuss how the financial statements of a business would differ if it were no longer regarded as a going concern.
Model answer
The concept. Going concern assumes a business will continue to operate for the foreseeable future and has no intention or need to close down or significantly reduce its operations.

Effect when it applies. Non-current assets are valued at cost less accumulated depreciation (carrying value), inventory at the lower of cost and NRV, and prepayments are carried forward — all on the basis of continued use.

If it is no longer a going concern.

Assets must be restated at their break-up / net realisable (forced-sale) values, which are usually much lower than carrying value.

Some assets (e.g. specialised plant) may be almost worthless on closure.

Liabilities may need reclassifying (e.g. long-term loans becoming repayable), and additional closure costs may be recognised.

Discussion. The going concern basis therefore has a major effect on reported asset values and net assets; abandoning it usually reduces them sharply, which is why auditors pay close attention to whether the assumption is valid.
Why this scores
Marking (point-based, ~6). Definition (~2); treatment under going concern (~2); restatement at break-up values + consequences on closure (~2). Contrasting carrying value with break-up value is the key idea.
Question 6
9706 Paper 3 style6 marks
Q (6 marks). A business has acquired a machine on hire purchase. Legally it will not own the machine until the final instalment is paid in three years. Explain, using the relevant concept, how the machine should be shown in the financial statements and why.
Model answer
The relevant concept is substance over form: transactions are recorded according to their economic reality, not just their legal form.

Economic reality. Although the business does not legally own the machine until the final payment, in substance it controls and uses the machine now and bears the risks and rewards of ownership.

Treatment.

The machine is shown as a non-current asset of the business (at cost) and depreciated over its useful life like any owned asset.

The amount still owed to the finance provider is shown as a liability (split between current and non-current).

The hire-purchase interest is charged as a finance cost in the statement of profit or loss.

Why. Recording only the legal form (no asset until the final payment) would understate the assets and liabilities and give a misleading view of the business's resources and obligations; substance over form gives a truer and fairer picture.
Why this scores
Marking (point-based, ~6). Name substance over form (1); economic reality vs legal form (~2); show asset + depreciate + liability + interest (~2); why it gives a fairer view (~1).
Question 7
9706 Paper 2 style2 marks
Q (2 marks). Define the matching (accruals) concept.
Model answer
The matching (accruals) concept states that income and the expenses incurred in earning it should be recognised in the period to which they relate, regardless of when the cash is actually received or paid.
Why this scores
Marking (point-based, 2). 1 mark for matching income with related expenses, 1 for 'in the period they relate to, not when cash moves'.
Question 8
9706 Paper 2 style4 marks
Q (4 marks). A business owner regularly takes goods from inventory for personal use. State, with reference to an accounting concept, why an entry must be made for these goods, and state the double entry.
Model answer
Concept — business entity. The business is treated as separate from its owner, so goods the owner takes for private use must be removed from the business's records rather than left as a business cost. Leaving them in purchases would overstate the business's expenses and understate its profit, misrepresenting the business's performance.

Double entry: Dr Drawings; Cr Purchases — at cost, because no sale has occurred.
Why this scores
Marking (point-based, 4). Name business entity (1) + explanation that private use must be separated (1); correct double entry Dr Drawings / Cr Purchases at cost (2).
Question 9
9706 Paper 3 style6 marks
Q (6 marks). State and explain the accounting concept that governs each treatment: (a) inventory that cost $7,000 but can now be sold for only$ 5,500 is valued at $5,500; (b) a building bought 10 years ago for$ 200,000 is still shown at $200,000 cost (less depreciation) even though its market value has risen.
Model answer
(a) Prudence. Inventory is valued at the lower of cost and net realisable value ( $5,500). Prudence requires that **assets and profit are not overstated**, so the foreseeable loss of$ 1,500 is recognised now rather than carrying the inventory at a value it cannot realise.

(b) Historic cost (supported by going concern and objectivity). Assets are recorded at their original cost (less accumulated depreciation), not at current market value. This keeps the figure objective and verifiable (the cost is evidenced by the purchase) and is consistent with the going concern assumption that the building will continue to be used rather than sold.
Why this scores
Marking (point-based, 6). (a) name prudence + explain lower of cost and NRV (~3); (b) name historic cost + explain why market value is not used (~3). Objectivity/going concern add depth.
Question 10
9706 Paper 3 style6 marks
Q (6 marks). In December a customer pays a $3,000 deposit for a machine that the business will deliver in February of the following year. The business's year end is 31 December. Explain, with reference to the relevant concepts, how the$ 3,000 should be treated in the financial statements for the year ended 31 December.
Model answer
Realisation concept. Revenue is recognised when it is earned — i.e. when the machine is delivered — not when the cash is received. At 31 December the machine has not been delivered, so the revenue has not yet been earned and must not be recognised as sales in this year.

Prudence concept. Profit should not be recognised before it is realised, which reinforces not treating the deposit as revenue yet.

Treatment. The $3,000 is shown as a liability (deferred income / payment received in advance) in the statement of financial position at 31 December. It is recognised as revenue in the following year, when the machine is delivered and the sale is performed.

This ensures the financial statements give a true and fair view, matching the revenue to the period in which it is actually earned.
Why this scores
Marking (point-based, ~6). Realisation — revenue when earned/delivered, not when cash received (~2.5); prudence reinforcement (~1); treatment as deferred income (liability) now, revenue next year (~2.5).

Key Definitions and Keywords — The Accounting Concepts

Definitions to memorise and the exact keywords mark schemes credit for the accounting concepts answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

Business entity concept
Examiner keyword
The business is treated as separate from its owner; only the business's transactions are recorded in its accounts.
Money measurement concept
Examiner keyword
Only items that can be measured reliably in money are recorded in the accounts.
Historic cost concept
Examiner keyword
Assets and transactions are recorded at their original cost.
Going concern concept
Examiner keyword
Financial statements assume the business will continue to operate for the foreseeable future, so assets are not valued at break-up values.
Consistency concept
Examiner keyword
The same accounting policies are applied from one period to the next so that results are comparable.
Prudence concept
Examiner keyword
Caution is exercised so that assets and income are not overstated and liabilities and expenses are not understated; losses are recognised early, profits only when realised.
Realisation concept
Examiner keyword
Revenue is recognised when it is earned (the sale is made/goods delivered), not when cash is received.
Matching (accruals) concept
Examiner keyword
Income and the expenses incurred in earning it are recognised in the period to which they relate, regardless of when cash is paid or received.
Duality concept
Every transaction has two effects, recorded as equal debit and credit entries.
Materiality concept
Examiner keyword
Only items significant enough to affect users' decisions need separate or strict treatment; trivial items can be treated simply.
Objectivity concept
Accounting records should be based on verifiable evidence and free from personal bias.
Substance over form
Examiner keyword
Transactions are recorded according to their economic reality rather than merely their legal form (e.g. an asset on hire purchase shown as the buyer's asset).

Common Mistakes and Misconceptions — The Accounting Concepts

The traps other students keep falling into on the accounting concepts questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Giving a vague definition without applying the concept
9706 Examiner Reports
Why it happens
Memorising names but not meaning.
How to avoid it
For each concept, learn a precise definition AND a concrete example; in 'explain' questions, link the concept to the specific treatment in the scenario.
✕Confusing prudence with matching
9706 Examiner Reports
Why it happens
Both affect year-end adjustments.
How to avoid it
Matching = recognise income/expense in the right PERIOD (accruals/prepayments/depreciation). Prudence = CAUTION (don't overstate assets/profit — allowances, lower of cost and NRV).
✕Thinking revenue is recognised when cash is received
9706 Examiner Reports
Why it happens
Everyday view of a 'sale'.
How to avoid it
Realisation recognises revenue when the SALE is made (goods/services delivered), even if the customer pays later (a credit sale).
✕Confusing going concern with consistency
9706 Examiner Reports
Why it happens
Both relate to continuity.
How to avoid it
Going concern = the business will CONTINUE (so assets at cost, not break-up). Consistency = same POLICIES each year (comparability).
✕Recording the owner's private items in the business accounts
9706 Examiner Reports
Why it happens
Owner and business feel like one.
How to avoid it
Business entity concept: only the business's transactions are recorded; the owner's private assets/spending are excluded (private use = drawings).
✕Treating a hire-purchase asset as not belonging to the buyer
9706 Examiner Reports
Why it happens
Legal ownership passes only at the end.
How to avoid it
Substance over form: the buyer controls and uses the asset, so it is shown as their non-current asset with the amount owing as a liability.

The Accounting Concepts

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1Identify the concept (4 marks)

2Apply the matching concept to an accrual (4 marks)

3Concept behind a treatment (5 marks)

4Inventory valuation and prudence (5 marks)

5Going concern and asset values (6 marks)

6Consistency and comparability (5 marks)

7Apply the materiality concept (4 marks)

8Apply several concepts to one scenario (6 marks)

9Revenue recognition — deposit in advance (5 marks)

10Resolving an apparent concept conflict (6 marks)

Business entity concept

Money measurement concept

Historic cost concept

Going concern concept

Consistency concept

Prudence concept

Realisation concept

Matching (accruals) concept

Duality concept

Materiality concept

Objectivity concept

Substance over form

✕Giving a vague definition without applying the concept

✕Confusing prudence with matching

✕Thinking revenue is recognised when cash is received

✕Confusing going concern with consistency

✕Recording the owner's private items in the business accounts

✕Treating a hire-purchase asset as not belonging to the buyer