Consistency Principle of Accounting


Definition of Consistency Principle (Concept, Convention) of Accounting:

Consistency principle (concept, convention) of accounting defines and states that, “accounting transactions and accounting methods should be treated in the same manner from one accounting period to another”. As a result, accounting users can have more meaningful comparisons of financial statements of different years.

Explanation, Use and Application of Consistency Principle:

Business should be consistent in applying different accounting methods and policies. Consistency principle of accounting does not prevent to change accounting methods and policies. However, on change of accounting policies or methods, the businesses should disclose the reason and explain the impact of any change.

For example, if a business changes FIFO method for valuing inventory to AVCO, then it must be explained that why the method is changed, and the effect it has had on profits.

If an error is discovered in the accounting records then it requires immediate correction even though that error also occurred in previous year(s) as well. This means that the presence of an error cannot be justified on the grounds that the error was also made in the previous years.

Example:

The owner of the business asked the accountant to prepare two income statements for the current year. In one statement, depreciation would be charged by using straight-line method, whereas, in the second one, reducing balance depreciation method would be used. The owner is thinking of to use the income statement showing the lower amount of profit.

Solution:

Consistency principle of accounting requires that the business should use the most appropriate depreciation method for the type of asset, and apply it consistently from year-to-year. In this way the accounts of different years are comparable. The policy may, however be changed. For example, from one method of depreciation to a not her-provided there are good reasons for doing, with a note to the financial statements explaining what has happened.