Consistency Principle: Definition and Example

There are several accounting principles or concepts that a business can follow or must follow to comply with regulatory instructions. In the case of mergers or acquisitions, a company may change its accounting methods to align with the what is the kiddie tax and how does it work newly merged entity’s accounting policies. IFRS also requires the entity to apply the same accounting policies in reporting its financial statements. In case there is any change in accounting policies and estimates, IAS 8 should be used. The consistency principle 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 principle prevents manipulation in accounts and makes financial statements comparable across historical periods.

• 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.
• Companies are required to follow Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), depending on the jurisdiction.
• For instance, if a business opts to use FIFO or LIFO method for its inventory management, it needs to use the same method consistently.
• In some cases, organizations will change how they report information in order to take advantage of loopholes or manipulate how data looks.
• This principle prevents manipulation in accounts and makes financial statements comparable across historical periods.
• Yes, a company can change its accounting methods, but it must provide a valid reason and disclose the change, including how it affects the financial statements.

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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. This switch is fine as long as Denise continues to use the LIFO method into the future doesn’t switch back to the FIFO method. For instance, LIFO raises cost of goods sold expense because higher value inventory is sold off first. And if management performance is based on Net Profit, management might play around with operating expenses to ensure that net profit looks favorable. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes purchases journal only and all users thereof should be guided accordingly.

Benefits of the Consistency Principle

The Consistency Principle makes financial statements more reliable and comparable, allowing analysts to track a company’s performance over time and make accurate projections. Consistency does allow a company to make a change to a more preferred accounting method. However, the change and its effects must be clearly disclosed for the benefit of the readers of the financial statements.

Important Considerations with the Accounting Consistency Principle

• Another benefit of the consistency principle is that it promotes accuracy and reliability in financial reporting.
• 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.
• These documents serve as guidelines for accountants and auditors to follow, ensuring that all financial data is recorded in a consistent manner.
• This can prevent users from making decisions based on inaccurate or misleading financial information.
• The ruling about consistency applies where a change in approach could affect the profit of a business.
• Failure to follow the Consistency Principle can lead to discrepancies in financial reporting, which may mislead stakeholders and damage the company’s credibility.

According to the consistency principle, Bob’s can change accounting methods for a justifiable reason. As long as the financial statements consistently use accounting policies and principles, the financial statements will be more accurate and reliable. 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).

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After almost a decade similarities and differences between accounting and bookkeeping of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. The Financial Accounting Standards Board refers to consistency as one of the characteristics or qualities that makes accounting information useful.

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The competition’s commissions such as SEC can also interpret such moves as artificial profit manipulation and result in penalties. Consistency also allows users to make meaningful comparisons between financial statements from different periods, helping them to better understand an entity’s financial performance and make informed decisions. The purpose of financial statements is to provide information about an entity’s financial position and performance to its users, such as investors, creditors, and regulators. There are many cases that caused the entity to apply inconsistent accounting principles or policies.

What is the aim of Consistency Principle?

The consistent application of a particular set of accounting methods and policies results in financial reports with a similar structure for multiple consecutive accounting periods. This helps stakeholders easily compare their company’s financial performance over multiple periods. The consistency concept is an accounting principle that states that once a company chooses an accounting method or policy, it should consistently apply that method or policy in all subsequent financial periods.