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What is the Consistency Principle?
The consistency principle argues that all accounting treatments should be used consistently throughout the current and future accounting periods, unless mandated by law or if a change will result in a better presentation of accounts. This idea avoids account tampering and allows financial statements to be compared across time periods.
To simply compare financial accounts, all accounting policies and accounting assumptions must be consistently applied. Suppose that a company modifies its accounting policies or underlying assumptions. In such a case, the reason for the change should be that the law requires it or that the change gives better preparation and presentation in the accounts. If the change is due to any other reason, that reason should be stated clearly, along with the effect of the change and the nature of the change, so that it attracts the attention of users and allows them to understand the change in profit due to a change in accounting estimates or assumptions.
Uses and Importance of Consistency Principle
- Accounting principles and standards must always be followed by all companies. Consistency being one of the fundamental accounting assumptions, it is assumed that all accounting policies from the prior year will be used in the current year as well until there is a change in those policies that is recorded. Comparability of financial data is made easier and account preparation is made simpler by consistency. It is used throughout many sectors, including manufacturing, business, and services.
- Every industry needs it to make sure that accounting principles and presumptions are consistently applied. Accountants become perplexed and users of financial statements become distracted by profit variances if accounting standards or assumptions change on a yearly basis. Due to its uniformity, this principle is important from both an accounting and an auditing perspective since it makes it easier for accountants to record business transactions. When comparing financial statements to previous years, it helps auditors.
- Because it gives shareholders and other stakeholders assurance that financial statements are more accurate and reliable, the consistency principle is crucial for them. A decision’s reliability is dependent on the accuracy of financial information and the way financial statements are presented.
Advantages of Consistency Principle
Facilitate Audit and Accounting
It assists accountants in documenting accounting operations and managing accounts. It enables auditors to compare financial statements and establishes the financial statements’ dependability.
Ease of Administration
Consistent application of accounting principles and estimates familiarizes management with accounting methods, technologies, treatments, and their impacts, which facilitates sound decision-making.
Reduce Training Expenses
If accounting principles are regularly followed, only initial training is required for the accounting personnel, hence lowering training expenses.
Allows the Financial Statements to be compared
The financial statements enable auditors and consumers to compare financial statements by adhering to the idea of consistency.
Disadvantages of Consistency Principle
Restriction on the use of different Accounting Policies and Assumptions
This constrains the management to adhere to the same rules and assumptions over the years, despite the fact that technological advancements need changes in accounting.
Judgment Errors
As the Consistency Principle is predicated on whether a modification improves the display of the accounts, important flaws and issues develop.
Changes Allowed
Only if the new method is deemed superior and presents financial data more effectively. The change and its impact on earnings must be disclosed in the financial statements produces a great deal of work and stress for the accounting department.
Conclusion
Consistency principle of accounting is a very fundamental principle that practically all organizations adhere to, whether they are government or private, for-profit or not-for-profit. According to this idea, all accounting policies must be consistently applied so that financial statements may be compared.
It provides auditors and accountants with convenience. Due to regularity, auditors believe financial statements to be more dependable, and accountants provide assistance with accounting methods and recordkeeping. In the financial accounts, the change and its impact must be described.
Change is likely to be assessed based on its retrospective effect; therefore, it becomes challenging for accountants to quantify the effect of change retrospectively, as it requires the most calculations. Changing accounting policies and estimations owing to better presentation and preparation is a matter of judgment; thus, a conflict occurs.
