Use consistency, prudence and accrual concepts
Explain consistency, prudence, realisation, materiality, objectivity, matching and substance over form in accounting decisions.
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These lessons cover Topic 1.2 only. The 2029 syllabus has a separate document and is not mapped here. Practice is self-checked, not an official Cambridge grade; timed-paper practice and human subject-teacher review remain outstanding.
Before you begin
- Topic 1.1 introduces business forms and finance. In these lessons, keep each transaction tied to its source evidence and record both sides of its effect.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A firm applies the same depreciation method each year when appropriate. Which concept supports comparability?
What you will learn
- Apply the remaining syllabus accounting concepts to cases
- Explain why consistent methods aid comparison
- Distinguish caution from deliberate understatement
Make comparable, evidence-based estimates
Consistency applies accounting policies in the same way from period to period where appropriate, supporting comparison. A change may be justified if it improves relevance or reliability, but should be explained rather than made to manipulate a result.
Prudence uses caution when making judgements under uncertainty; it is not permission to deliberately understate assets or profit. Objectivity means information should be supported by evidence, while estimates still require judgement.
Materiality focuses attention on information significant enough to influence users. An item can be material because of its amount or its nature, even if its monetary value is relatively small.
Recognise the substance and timing of transactions
Realisation links recognition of revenue to when it is earned under the applicable basis, not simply when cash arrives. Matching or accruals records income and expenses in the period to which they relate, adjusting for amounts received or paid in different periods.
Substance over form considers the economic reality of an arrangement as well as its legal form. The label on a contract does not always describe who controls a resource or bears its risks; apply the relevant accounting requirements to the substance. Duality remains the two-sided effect recorded for transactions.
Pause and explain
An accountant deliberately understates an asset to make the company look weaker. Is this prudence?
Worked example
A company receives $1,200 in advance for a service it will provide next month. Explain why all the cash is not automatically this month's income.
Show the worked solution
- Cash has been received, but the service has not yet been provided.
- Realisation and accruals focus on when income is earned and which period it relates to.
- The unearned amount may be recorded as a liability until the service is provided.
Answer The $1,200 cash receipt does not alone show that the income has been earned. Under the accruals basis, the advance is generally a liability until the service is provided.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A business pays $2,400 insurance for twelve months beginning 1 October. Its year ends 31 December. How much insurance expense relates to the three-month period, before other adjustments?
Give me a hint
Allocate the annual cost to the months used in the year.
Compare my reasoning
- Monthly cost = $2,400 ÷ 12 = $200.
- Three months relate to October, November and December.
- Expense = 3 × $200 = $600; the remaining $1,800 is prepaid.
$600 is the period expense and $1,800 is a prepayment, assuming even coverage across the year.
Look for these in your work
- Monthly amount calculated
- Period allocation correct
- Prepayment identified
Two policy choices are both allowed. The business changes policy this year and its profit rises, but gives no explanation. Which concepts should a reader consider?
Give me a hint
Consider comparability and whether the change has a sound accounting reason.
Compare my reasoning
- Consistency supports comparing results over time.
- A justified change may improve relevance or reliability.
- The business should disclose and explain a material change rather than leaving users unable to compare.
Consistency and transparency matter. A policy change may be appropriate if justified, but unexplained changes make comparison harder and can raise questions about objectivity.
Look for these in your work
- Consistency named
- Justified change allowed
- Explanation required
A company receives a legal claim for $80,000; its adviser estimates a likely settlement range of $60,000–$90,000. Explain how prudence and objectivity should guide the estimate.
Give me a hint
Use caution, but anchor the estimate in evidence.
Compare my reasoning
- Prudence calls for caution where outcomes are uncertain.
- Objectivity requires support from the adviser, case evidence and applicable accounting requirements.
- Do not simply choose the lowest or highest amount to manage profit.
Use an evidence-based estimate under the applicable requirements and apply caution to uncertainty. Prudence is not a licence to select a deliberately low figure; the judgement should be supportable and transparent.
Look for these in your work
- Uncertainty acknowledged
- Evidence required
- Manipulation rejected
Common mistakes
- Using prudence to justify systematic understatement
- Changing methods without an accounting reason
- Treating cash receipt as identical to revenue earned
What can you explain now?
Which concept supports recording income in the period it is earned rather than when cash arrives?
Compare with the explanation
Matching / accruals
Accrual accounting relates income and expenses to the relevant period.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
How do consistency and prudence help without allowing deliberate manipulation?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.