Consistency Principle of Accounting
What Is the Consistency Principle? -Definition
The Consistency principle of accounting states that once an entity has adopted a certain practice and method, it should use same practice and method for subsequent events of the same nature unless it has a sound reason to change them.
Sometimes accountant has to deal with such issues which can be handled by a variety of principles e.g. depreciation of fixed assets, valuation of stock, etc. This principle stresses that the accountant should select one approach and should use it consistently.
The ruling about consistency applies where a change in approach can affect the profit of a business. But this does not mean that change can never be made. Any reasonable change which can improve the work of accounting can be made but an appropriate note about this change must be given to make it clear.
Often there are more than one correct ways of doing a task. For example, there are many acceptable methods of calculating depreciation on fixed assets. A business can choose any of them for computing depreciation for any of its assets without contravening any of the accounting principles or concepts. However, whatever method is chosen for the purpose of depreciation, must be consistently used for the same class of assets year after year.
The objective is to ensure that the performance of different years may be measured and judged on the same basis year after year. For example, if a business uses straight-line method for computing depreciation on its motor vehicles in 2015 but changes the method to declining balance method for the next year, the accounts for these two years will not be comparable.
While the consistency principle essentially refers to having unchanged basis of accounting from one financial year to another, it also has another important fact. This involves being in line with whatever accounting principles, standards, and concepts are being used by other business units in like fields. i.e., having accounting policies consistent with the rest of the industry. For example, most oil marketing companies use the same methods of capitalization, or income recognition, or treatment of research expenditure, etc.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.