Consistency concept in Accounting-By this post, we shall study in detail the important consistency concept out of 12 various accounting concepts on which accounting is based. If you have a business and making financial accounts then you should know about these important consistency concepts which tell that should follow accounting methods consistently.
Contents of this post
What is the consistency concept?
The consistency concept refers to the situation where an enterprise should adopt an accounting principle or method, continue to follow it consistently in future accounting periods. In simple words, it states that all accounting treatments should be followed consistently throughout the current and future period unless required by law to change or the change gives a better presentation in accounts. This consistency concept stops manipulation in accounts and makes financial statements comparable across historical periods.
How can you explain the consistency concept?
The consistency concept can be explained in order to achieve comparability of the financial statements of an enterprise through time, the accounting policies are followed consistently from one period to another; a change in an accounting policy is made only in certain exceptional circumstances.
The concept of consistency is applied particularly when alternative methods of accounting are equally acceptable. For example, a company may adopt several methods of depreciation such as the written-down-value method, straight-line method, etc. Likewise, there are many methods for the valuation of inventories.
But following the principle of consistency, it is advisable that the company should follow consistently over years the same method of depreciation or the same method of valuation of Inventories which is chosen. However in some cases, though there is no inconsistency, they may seem to be inconsistent apparently. In the case of valuation of Inventories if the company applies the principle ‘at cost or market price whichever is lower and if this principle accordingly results in the valuation of Inventories in one year at cost price and the market price in the other year, there is no inconsistency here. It is only an application of the principle.
But the concept of consistency does not imply non-flexibility as not to allow the introduction of an improved method of accounting.
An enterprise should change its accounting policy in any of the following circumstances only:
- To bring the books of accounts in accordance with the issued Accounting Standards.
- To comply with the provision of law.
- When under changed circumstances, it is felt that the new method will reflect a more true and fair picture in the financial statement.
Example of consistency concept?
These are examples of the consistency concept
Example 1-Company M ltd is a retailer dealing in shirts. It used the first-in-first-out method of inventory valuation in respect of shirts at Branch A and the weighted average inventory valuation method in respect of similar shirts at Branch B. Here, the auditors must investigate whether there are any valid reasons for the different treatment of similar inventory located at different locations. If not, they must direct the company to use any one of the valuation methods uniformly for the whole class of inventory in all branches.
Example 2– Company N ltd has been using Written down depreciation method for its machinery equipment. According to the consistency concept, it should continue to use the Written down depreciation method in respect of its machinery equipment in the following periods. If the company wants to change it to another depreciation method, say for example the straight-line method, it must provide in its financial report, the reason(s) for the change, the nature of the change, and the effects of the change on items such as accumulated depreciation.
Example 3-If Company O follows the straight-line method of depreciation and after some time law changes, which tells that every entity is required to follow the written down value method of depreciation retrospectively. Now, Company O has to provide depreciation as per written down value method retrospectively and accordingly charge the depreciation and effect on profit due to change in method of depreciation to be disclosed and fact that method of depreciation has been changed due to change in law also to be disclosed in the financial statement so that users can understand easily.
What is the importance of the consistency concepts?
The consistency concept is important for a business both from an accounting and auditing point of view as having a consistent set of accounting principles, procedures helps accountants in recording business transactions in an orderly manner.
While in the case of auditors, it helps compare business data much easier as the same accounting methods are followed consistently. It also provides the stakeholders and shareholders with a sense of satisfaction that the performance of the business can be tracked using a tried and tested accounting methodology which gives consistent results.
The accuracy of the provided information can be assured as there is no change when following the consistency principle, which enables shareholders and management in making better business decisions.
How does the consistency concept work?
The consistency concept works in order to achieve comparability of the financial statements of an enterprise through time, the accounting policies are followed consistently from one period to another; a change in an accounting policy is made only in certain exceptional circumstances.
The concept of consistency is applied particularly when alternative methods of accounting are equally acceptable.
For example, a company may adopt several methods of depreciation such as the written-down-value method, straight-line method, etc. Likewise, there are many methods for the valuation of inventories.
Faqs related to consistency concepts
What do you mean by consistency in accounting?
The concept of consistency means that accounting methods once adopted must be applied consistently in the future. Also, the same methods and techniques must be used for similar situations.
What are the advantages of the consistency concept?
Following are the advantages of the consistency principle
1. Following a consistent accounting principle helps reduce the need for training of the staff which reduces the training cost.
2. It makes the management familiar with the accounting principles and practices and therefore is in a better position to make business decisions.
3. Consistency in accounting principles is helpful in performing a comparative study of the financial performance of the business.
4. It enables auditors to perform comparative analysis on the financial performance of the business by taking into account data obtained from different accounting periods.
5. It helps accountants in recording financial transactions and managing the company accounts.
6. it makes the financial statement comparable.
What are the disadvantages of the consistency concept?
Following are the disadvantages of the consistency principle
1. It restricts to following the same accounting policies and methods.
2. It can result in judgment errors as the decision by management in changing accounting methods may or may not yield positive results.
An Accountant, GSTP, GST blogger, Website Creator, SEO Builder & Co-founder of the website https://gstportalindia.in for the help of GST Taxpayers of India. Having a perfect accounting experience of more than 10 years in a Private Ltd Company.