The consistency principle in accounting encourages accountants to prepare financial statements following the same accounting principles, techniques, practices, and procedures from one accounting period to the next to be consistent. This allows readers of the financial records to effectively compare years which is called year by year comparison.
Consistently, a firm might move to a preferred accounting method. For the benefit of the financial statement’s readers, the change and its repercussions must be disclosed.
According to the Financial Accounting Standards Board, consistency is one of the characteristics or features that contribute to the usefulness of accounting information.
Examples of 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).
The Importance of the Principle of Consistency
The purpose of the consistency principle is to ensure that the financial statements are comparable from period to period. Since consistency is one of the fundamental accounting assumptions and there is no evidence to the contrary, it is expected that the accounting procedures used last year would be used again this year. Regardless of the business, standardization simplifies account preparation.
Accounting standards and assumptions should be followed consistently from year to year to give clarity and eliminate confusion for accountants and readers of financial statements. Accounting and auditing are both aided by the consistency concept. It provides accountants with a solid framework for efficiently recording firm transactions. It enables auditors to compare financial accounts from one year to the next.
The advantages of using the Consistency Principle
The Consistency Principle provides the following advantages for business owners:
- Ease in auditing: While recording accounting actions and managing accounts, accounting professionals benefit from consistency. It provides the basis for the reliability of the financial statements and assists auditors in comparing the financial statements. Auditors often fail to offer an analysis of the Consistent Principle that is not respected.
- Save time: Rather than having to learn and train in many methodologies, you and your accounting team are acquainted with a single, standardized manner of reporting data.
- Observe trends and patterns: Business owners need to see patterns and trends in their financial data. If there is no regular protocol for reporting and recording the facts, you may ignore them.
Final Thought
In its simplest form, the Consistency Principle asserts that once a corporation, or more specifically a bookkeeper or accounting department, selects a certain accounting principle or strategy for collecting and reporting information that approach must be utilized consistently going forward. To ensure that its financial data can be compared from year to year, the company must compile its financial reports following the same accounting standards and procedures.
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