Consistency Principle

Updated on January 2, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is the Consistency Principle?

The 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

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 are to be followed consistently to compare financial statements easily. Suppose an entity changes its accounting policies or assumptions. In that case, 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 theFinancial 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 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 estimateChange In Accounting EstimateA change in accounting estimate occurs when there is the appearance of new information, which replaces the current data based on which the company had taken an earlier decision, resulting in two things – changing the carrying amount of an existing asset or liability and alteration of subsequent accounting for recognition of future assets and liabilities.read more or assumptions.

Consistency Principle

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Consistency Principle (wallstreetmojo.com)

Example of Consistency Principle

Accounting for Financial Analyst (16+ Hours Video Series)

–>> p.s. – Want to take your financial analysis to the next level? Consider our “Accounting for Financial Analyst” course, featuring in-depth case studies of McDonald’s and Colgate, and over 16 hours of video tutorials. Sharpen your skills and gain valuable insights to make smarter investment decisions.

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 changes in technology, situations demand the change in accounting, but this principle restricts the same.
  • Judgment Errors: As the Principle of consistency is based on whether change gives a better presentation in accounts, critical errors and problems arise.
  • Changes Permitted: Only when the new method is considered better and gives a better presentation in accounts. The change and its effect on profit to be disclosed in the financial statements creates lots of calculations and pressure on accounting staff.

Conclusion

  • It is a very important principle and is almost followed by all organizations, whether Governmental organizations or private organizations, profit-making or nonprofit 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. Due to consistency, auditors find the financial statements more reliable, and accountants give help in accounting procedures and making accounting records. The change and effect of the change are to be disclosed in the financial statements.
  • Change is probably 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. Changing accounting policies and estimates due to better presentation and preparation is a matter of judgment; hence conflict arises

Recommended Articles

This has been a guide to What is the Consistency Principle & its Definition. Here we discuss the examples of consistency principle accounting and its uses & importance along with its advantages and disadvantages. You can learn more about it from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *