What Is The Consistency Principle of Accounting?

It’s important to auditors who need comparable results from one accounting period to the next. If your financial statements violate the consistency principle, the auditor may refuse to give an opinion. The primary reason for the Consistency Principle is to make the https://turbo-tax.org/how-to-calculate-employer-federal-withholding/ financial statements comparable from period to period. As consistency is one of the fundamental accounting assumptions unless there is documentation supporting a change, it is assumed that the accounting policies used last year are followed in the current year.

Then, the company should continuously and constantly stick to this method to evaluate their fixed assets. For example, if the performance is based on Net Sales, management might not recognize revenues by using the same accounting policies. But, the company subsequently wants to change its accounting policies from a straight line to a declining balance. Moreover, the consistency principle helps entities to identify errors and omissions in financial statements, enabling them to correct any inaccuracies before the financial statements are released to users. In addition, this concept, the consistency principle, is also quite important for users of financial statements, investors, and shareholders.

Example of the consistency principle:

Imagine that a corporation calculates its cost of goods sold and inventory value using the FIFO cost flow assumption. Given the growing cost of its components, it is determined that LIFO more properly reflects the company’s true profit. The company must report the discontinuity in consistency in the year that the change from FIFO to LIFO occurs (as well as the years where comparisons are made).

As long as the financial statements consistently use accounting policies and principles, the financial statements will be more accurate and reliable. When these gift certificates are sold, Todd sometimes credits a sale and sometimes he credits a gift cards payable account. Todd decides what to credit at the end of the month when his income numbers come in.

Importance/advantages of consistency principle

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. We’ve given one consistency concept in accounting example above with the case of cash vs accrual methods.

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. This principle can help companies make the right decisions when it comes to financial reporting. It is vital for business success, and it can make a difference in the performance of your business.

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This will enable users to comprehend any alterations to the accounting estimates or assumptions and their impact on profits. The consistency principle asserts that, unless a modification is required by regulation or improves the presentation of the accounts, all accounting treatments should be applied consistently across the current and future periods. This rule prevents accounting fraud and ensures that financial statements are similar across time. Consistency in accounting methods and principles is critical for the users of financial statements because it enables them to make meaningful comparisons between financial statements from different periods. There are many cases that caused the entity to apply inconsistent accounting principles or policies. For example, there is a requirement to change accounting policies by the standard setter.

• This principle can help companies make the right decisions when it comes to financial reporting.
• This allows the readers of the financial statements to make meaningful comparisons between years.
• Given the growing cost of its components, it is determined that LIFO more properly reflects the company’s true profit.

– Assume our example above except now Todd has decided to change is method of accounting from using both sales and gift cards payable to only accounting for his gift cards in a payables account. Todd is changing from a non-GAAP appropriate method to an approved method of accounting. Inventory valuation methods are a good example of an accounting method that companies usually change at some point in their history. Each method has a slightly different outcome depending on what management is trying to accomplish. A company’s accounting results are verifiable when they’re reproducible, so that, given the same data and assumptions, an independent accountant would come up with the same result the company did.

What happens if any business violates the principle of consistency while reporting the financial statement?

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