Consistency is a fundamental accounting principle that requires a business to use the same accounting methods from one period to the next. This means if a company chooses a particular way of recording transactions in one year, it should apply the same method in subsequent years, unless there is a valid reason for changing it.
Why is Consistency Important?
Consistency provides comparability of financial statements over time. It allows users of financial statements (such as investors, creditors, and analysts) to compare the performance and financial position of a company from one period to another. Without consistency, comparisons would be misleading.
Examples of Consistency in Practice
Depreciation Methods: If a company uses the straight-line method for depreciating a particular asset in one year, it should continue to use the straight-line method in the following years.
Inventory Valuation: If a company uses FIFO (First-In, First-Out) for valuing inventory in one year, it should continue to use FIFO in subsequent years.
Revenue Recognition: If a company recognizes revenue when goods are delivered in one year, it should continue to recognize revenue upon delivery in the following years.
Accounting Policies: Any consistent accounting policies adopted by a business should be applied uniformly over time.
When is a Change in Accounting Method Permitted?
While consistency is crucial, there are limited circumstances where a change in accounting method is permitted. These changes are usually made when:
A more appropriate method becomes available: If a new accounting method is introduced that provides a more accurate or relevant representation of the company's financial performance, it may be adopted.
The existing method is no longer suitable: If the existing accounting method is no longer appropriate due to a change in the nature of the business or the accounting environment, a change may be necessary.
A change is required to comply with accounting standards: New accounting standards may require a company to change its accounting methods.
Any change in accounting method must be disclosed in the financial statements, along with the reason for the change and the effect of the change on the financial statements.
Table Summary
Principle
Definition
Importance
Example
Consistency
Using the same accounting methods from one period to the next.
Allows for comparability of financial statements over time.
Using the same depreciation method for assets each year.
Change in Accounting Method
Switching to a different accounting method.
Ensures financial statements remain relevant and accurate. Must be disclosed.
Adopting a new inventory valuation method.
Suggested diagram: A timeline showing financial statements from multiple years, with the same accounting method consistently applied each year.