IGCSE Accounting 0452 - Topic 7.1: Accounting Principles - Consistency

Introduction

Consistency is a fundamental accounting principle that requires a business to use the same accounting methods from one period to the next. This means that if a company chooses to value its inventory using FIFO (First-In, First-Out) this year, it should continue to use FIFO next year, and not switch to a different method like weighted average.

Why is Consistency Important?

Consistency provides comparability of financial statements over time. It allows users of financial statements (investors, creditors, etc.) to accurately compare the performance of a company from one period to another. Without consistency, comparisons would be misleading.

Examples of Consistency in Practice

1. Inventory Valuation: As mentioned above, consistently using FIFO, weighted average, or specific identification for valuing inventory.
2. Depreciation Methods: If a company uses the straight-line method for depreciating its assets in one year, it should continue to use the straight-line method in subsequent years.
3. Revenue Recognition: If a company recognizes revenue when goods are delivered, it should continue to do so consistently.
4. Accounting Policies: Consistency in applying accounting policies related to expenses, gains, and losses.

Consequences of Inconsistency

Inconsistency can make it difficult to assess a company's financial performance and position. It can also make it harder to compare a company's performance to that of its competitors.

Example Scenario

A company uses the FIFO method for valuing its inventory in 2023. In 2024, the company decides to switch to the weighted average method. This is a breach of the consistency principle. The financial statements for 2023 and 2024 will not be comparable because the inventory valuation methods are different.

Table Summary

Principle	Definition	Importance	Example
Consistency	Using the same accounting methods from period to period.	Allows for comparability of financial statements over time.	Consistent inventory valuation method (FIFO, Weighted Average, etc.)
Going Concern	Assumes the business will continue to operate for the foreseeable future.	Ensures financial statements are prepared on the basis that the business will not be liquidated.	Reporting assets at historical cost rather than liquidation value.
Matching	Matching expenses with the revenues they helped to generate.	Provides a more accurate picture of profitability.	Matching cost of goods sold with sales revenue.

Suggested diagram: A simple timeline showing financial statements for several years with the same accounting method consistently applied. Label the years and the accounting method used each year.