Consistency Concept in Accounting

Consistency Concept in Accounting

The consistency concept states that the methods, practices or policies of accounting once followed must be followed consistently from one year to another but can be changed in the exceptional circumstances like changes in the government laws & regulations, changes in issued accounting standards or any other situation where it is felt that the change in accounting practice may result in more accurate picture of financial statements.

Explanation with example:

The financial statements of the companies are required to draw conclusions regarding the performance of an enterprise and the conclusion can be clearly analyzed when the past performances are compared with the current performances. In order to do comparisons, it is important that the accounting policies & practices followed in every year is uniform and consistent over a period of time. Therefore the principle of consistency requires that the businesses should follow uniform accounting policies and practices consistency in future accounting periods.

But in the following cases the enterprise may change its policies & practices of accounting:

1. When such change is required by law.

2. To comply with the requirement of accounting standards

3. When it is felt that the new accounting policy or practice will provide more accurate & fair picture.

For example there are two methods of calculating depreciation; one is straight line method (SLM) and the other is written down value method (WDV). The company chooses to depreciate asset as per SLM in the year 2020 but in the year 2021 company adopted WDV Method to depreciate assets.  Since the methods are different each year therefore the comparison of the amount of depreciation between both years cannot provide accurate results related to the increase/ decrease in the amount of depreciation year to year.

Similarly company should decide which method of inventory valuation they want to follow and one method adopted should be followed consistency but  suppose a company adopted LIFO (Last in first out)method of valuation of closing stock but then the accounting standards removed LIFO method of valuation then in such case the company can switch to other method.

Advantages:

The advantages of Consistency concept are as follows:

1. The consistency principle is most important for the users (Auditors, investors, lenders , management etc.) of the financial statements as it makes the financial performance of the business comparable as they hold similar structure otherwise the users cannot get the accurate picture of the growth of the business.

2. If the policies and practices followed by the business are consistent then the time and cost that is needed to be spent on learning new policies & methods can be saved.

 Disadvantages:

The disadvantages of Consistency concept are as follows:

1. The consistency principle restricts the enterprise to follow same accounting policy or practice over a period of time. Therefore sometimes a minor change in factor requires change in policies & practices for more clear results but this concept restricts it. For example technological changes may require change in accounting policy but the consistency concept does not allow such change.

2. Even the judgment error may occur while taking the decision about the change in accounting methods because whether the change in accounting policy or practice will provide better result or not is based on the judgment of the management.

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