What is Consistency Concept of Accounting? Explanation with Example

consistency concept

What is Consistency Concept of Accounting?

The consistency concept in accounting principles states that once an entity has decided on one accounting method, it should use the same method for all subsequent events of the same character unless it has sound reason to change the methods.

If an entity is changing the methods frequently for recording the different event takes place in business, for example frequently changing from straight line method to written down value method for depreciation of any fixed asset, then it is wrong. This makes the comparison of financial statements for one period with those of another period would be difficult.

Because of this accounting principle only, changes in the methods for keeping accounts are not made lightly. So, if an organizing is switching methods, the outsider auditors need to report this in their opinion letter.

In addition to this, consistency has a narrow meaning here. It refers only to consistency over time, not to logical consistency at a given moment of time. For example, fixed assets are recorded at cost, however inventories are recorded at the lower of their cost or market value. Some argues that this s inconsistent. Mind it, this concept doesn’t mean that the treatment of different categories of transactions must be consistent with one another. This concept states that transactions given category must be treated consistently from one accounting period to the next.

Consistency Concept Example

Say a company XYZ is using straight line method for depreciating the machinery. However in next year company decides to switch to written down value method. Now the company ask for its audit and auditors does not report it. As per consistency concept, company has violates the accounting principle.



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