Consistency Principle in Accounting_00.1
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Consistency Principle in Accounting

 

Consistency Principle in Accounting

  • Definition: The consistency principle states that once you decide on an accounting method or principle to use in your business, you need to stick with and follow this method or principle consistently throughout your accounting periods.
  • Need of consistency principle: The key purpose of the consistency principle, or consistency concept, is to ensure that transactions or events are recorded in the same way, from one accounting year to the next.
    • In other words, businesses should not use a certain accounting method one year, and a different accounting method the next year.

Consistency Principle in Accounting_50.1

 

Is changing the accounting method permissible?

  • Businesses do not have to stick to the same accounting method forever. They are allowed to change their method, but this change will need to be accounted for.
  • In cases where a business might need to change the accounting method or principles that it uses in its business for a valid reason, then the effects of this change need to be clearly disclosed in the company’s financial statements.

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Importance of Consistency Principle in Accounting

  • Sticking to consistency principle holds the following key importance-
  • Comparable financial information: The use of the consistency method makes it easier for bankers, managers, creditors, and other stakeholders to compare the performance of the business over different financial years.
  • Familiarization with the process: Accountants and managers will become familiar with the accounting method, and by being consistent, you will only require the initial training for this method. This will lead to efficiency both in terms of cost and time.
  • For Auditors: Following the consistency principle, auditors will demand reasons for any changes that could affect the interpretation of the financial statements of a business.
    • Auditors are external individuals who are trained to make sure the accounting data provided by a company corresponds to the activities of that company.

Accrual Accounting vs Cash Accounting

 

Example of Consistency Principle in Accounting

  • Let’s assume that a U.S. corporation uses the FIFO cost flow assumption for valuing its inventory and determining its cost of goods sold.
  • Due to the increasing cost of its materials, it concludes that LIFO will better indicate the company’s true profit.
  • In the year of the change from FIFO to LIFO (and in years when comparisons are presented), the company must disclose the break in consistency.

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