Consistency Principle

What is the Consistency Principle?

Consistency Principle states that all accounting treatments should be followed consistently throughout the current and future period unless required by law to change or the change gives a better presentation in accounts. This principle prevents manipulation in accounts and makes financial statements comparable across historical periods.

Explanation

According to this, all accounting policiesAccounting PoliciesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level.read more or accounting assumptions to be followed consistently so that financial statements can be easily comparable. If an entity changes the accounting policies or assumptions then it should be by the reason that law demands the change or change gives better preparation and presentation in accounts and if there is change due to any other reasons that reason to be stated clearly and also an effect of change and nature of the change to be disclosed in the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more so that it attracts the attention of users and users can understand the change in profit due to change in accounting estimate or assumptions.

Consistency Principle

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Example of Consistency Principle

Uses and Importance of Consistency Principle

Advantages

Disadvantages

  • Restrict to Follow the same Accounting Policies and Assumptions: This restricts the management to follow the same principles and assumptions over the years and due to change in technology situations demand the change in accounting but this principle restricts the same.
  • Judgment Errors: As Principle of consistency based on a judgment of whether change gives a better presentation in accounts hence judgmental errors and problems arise.
  • Changes Permitted: Only when the new method is considered better and gives a better presentation in accounts. The reason for the change and its effect on profit to be disclosed in the financial statements creates lots of calculations and pressure on accounting staff.

Conclusion

  • This is a very important principle and almost followed by all organizations whether Governmental organizations or private organizations, profit-making or nonprofit making organizations. According to this principle, all accounting policies are to be followed consistently so that financial statements make the comparison.
  • It gives ease to both auditors and accountants and due to consistency auditors find the financial statements more reliable and for accountants gives helps in accounting procedures and making accounting records. The reason for the change and effect of the change is to be disclosed in the financial statements.
  • Most probably change is to be calculated from retrospective effect hence it becomes difficult for accountants to calculate the effect of change retrospectively as it involves the maximum calculations. Whether to change accounting policies and estimates due to better presentation and preparation is the matter of judgments hence conflict arises.

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