The consistency principle of accounting states that once an entity has adopted a certain practice and method, it should use the same practice and method for subsequent events of the same nature unless there is a sound reason to switch. Sometimes, an accountant has to deal with issues that can be handled by a variety of principles (e.g., depreciation on fixed assets, valuation of stock, etc). This principle stresses that the accountant should select one approach and apply it consistently. The ruling about consistency applies where a change in approach could affect the profit of a business. However, this does not mean that changes can never be made. Any reasonable change to improve the work of accounting is permitted, but an appropriate note to explain the change must be written to make it clear. Often, there is more than one correct way to complete a task. For example, there are many viable methods of calculating depreciation on fixed assets. A business can choose any of them to compute depreciation for any assets without contravening any accounting principles or concepts. However, in this example, whatever method is chosen for the purpose of depreciation must be consistently used for the same class of assets year after year. The objective of this principle is to ensure that the performance of different years can be measured and judged on the same basis year after year. For example, if a business uses the straight-line method to calculate depreciation on its motor vehicles in 2015 but changes the method to the declining balance approach for the next year, the accounts for these two years will not be comparable. While the consistency principle essentially refers to having an unchanged basis of accounting from one financial year to another, it also has another important aspect. This involves being in line with whatever accounting principles, standards, and concepts are in use within other business units in similar fields (i.e., having accounting policies consistent with the rest of the industry). For example, most oil marketing companies use the same methods of capitalization, income recognition, or treatment of research expenditure.Consistency Principle: Definition
Consistency Principle: Explanation
Example
Consistency Principle of Accounting FAQs
According to the principle of consistency, once an entity has adopted a practice or method for recording transactions, it should apply the same practice or method for subsequent transactions unless there is a sound business reason to deviate from what is already in use.
The main objective behind this principle is to ensure that performance can be measured and judged on the same basis year after year. For example, if a business uses the straight-line method for Depreciation on its motor vehicles in 2015 but changes it to the declining balance method for next year, accounts of these two years will not be comparable.
Consistency refers to using same Accounting Principle or method for recording transactions while conservatism refers to use of lower value in reporting that could lead to overstatement of assets, revenue, and income. In other words, consistency applies when there are multiple methods for valuing an asset but conservatism implies use the lowest value in the reports.
Accounting standards do not say that business should adhere to the principle of consistency in every case. Changes can be made to improve work of accounting, but an appropriate note must be given which explains about change made.
Consistency refers to using same terms when reporting the figures. For example, if profit before tax is used for year 1 and profit after tax is used for year 2, it would not be considered as consistent with communication standards. On the other hand, communication principles do not refer to use of the same accounting policies.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
