Consistency principle

Consistency principle is one of the main accounting principles. The basic assumption of this rule is the application of the same methods, standards and practices in the company's accounting, both in a given financial period and the period following to it. In this way, it is possible to compare reports in subsequent accounting periods. The same procedures used by accountants are aimed at preventing the occurrence of non-compliance. In the case of modifications of financial methods, employees who keep accounting books are obliged to present them. The consistency principle is intended to prevent a situation where the management of the company could falsify financial information in order to maintain general opinions about the goodness of the financial statements. Reports of companies applying the consistency principle are commonly recognized are credible and accurate. In the The Financial Accounting Standards Board's opinion, the principle is one of the most important features of effective accounting information

Definition by Cambridge Business English Dictionary

The term is described in the dictionary as one of the main principles functioning in accounting. Its meaning includes the use of the same billing procedures in both this year and the previous year. According to this idea, a company applying the principle of cohesion should reach for the same accounting methods in similar cases in the future.

Advantages of consistency principle

The consistency principle is essential for the functioning of the accounting in the enterprise.

• Audit

During the financial audit in enterprises, the auditors are interested in financial reports and keeping to the consistency principle by the company's management.

• Management

The application of the same accounting procedures facilitates the work of people responsible for accounting books in the company, and also improves the entire process of company management.

• Costs

Employees are trained only at the beginning to familiarize themselves with new accounting methods, which reduces overall costs for the company.

• Comparison

With the help of the consistency principle, it is possible to keep accounting books in a similar manner in different financial periods. This makes it easier to compare results over time.

Examples of Consistency principle

• Using the same accounting method to book similar transactions. For example, a company should use the same method in booking revenue from sales in different quarters.
• Utilizing the same accounting standards for different reporting periods. For example, a company should apply the International Financial Reporting Standards (IFRS) for all its financial statements.
• Adhering to the same accounting policies throughout the year. For example, a company should use the same depreciation methods for all its fixed assets in a given financial year.
• Using the same valuation techniques in valuing its assets and liabilities. For example, a company should use the same valuation approach in valuing its inventory in different quarters.

Limitations of Consistency principle

The Consistency Principle has a number of limitations that must be addressed to ensure accurate and reliable financial information. These include:

• Changes in accounting standards - Changes in accounting standards may make it difficult to compare financial information from different reporting periods since the same standards may not be applied.
• Changes in business practices - Changes in business practices such as a shift in the company’s products or services could affect the accuracy of the financial information reported by the company in different periods.
• Changes in management - Changes in management, such as the hiring of new personnel, can lead to inconsistencies in the financial information reported by the company.
• The use of estimates - The use of estimates can lead to inaccuracies in the financial information reported by the company.
• Inflation - Inflation can affect the accuracy of the financial information reported by the company.
• New technology - The emergence of new technology can make it difficult to accurately compare financial information from different reporting periods.

Other approaches related to Consistency principle

An introduction to the other approaches related to Consistency Principle would be going over the other accounting principles that also help create accurate, reliable financial statements. These include:

• Accrual Basis of Accounting - This principle states that revenue and expenses should be recognized and reported when they are earned or incurred, regardless of when cash is exchanged.
• Matching Principle - This principle states that revenue and expenses should be matched with each other in the same accounting period.
• Materiality Principle - This principle states that material items must be reported on financial statements, but immaterial items may be omitted.
• Full Disclosure Principle - This principle states that all information that is necessary for the understanding of financial statements must be included.

Overall, the consistency principle is closely related to the other accounting principles as it helps to ensure accurate, reliable financial statements. These other principles help to determine which items should be reported and how they should be reported.

Footnotes

Consistency principle — recommended articles

Accounting Convention — Accounting concepts — Accrual method — Prior period adjustments — Materiality principle — Conservatism principle — Periodicity concept — Time period concept — Accounting Principles

References

• Aicpa (2018), Consistency of Financial Statements, Aicpa
• Levine P., Pearlman J., Yang B. (2011), Imperfect Information, Optimal Monetary Policy and the Informational Consistency Principle, University of Surrey
• Ncert (2016), Theory Base of Accounting, Ncert
• Ouda H. (2017), Reshaping the Application of Matching and Consistency Principles and Going Concern Postulation to fit the context of Public Sector entities, University Technologi Subang Jaya
• Shapiro A. (2009), On a time consistency concept in risk averse multistage stochastic programming, Operations Research Letters 37

Author: Patryk Schmidt