Consistency Principle: Definition
The consistency principle of accounting states that once an entity has adopted a certain practice and method, it should use the same practice and method for subsequent events of the same nature unless there is a sound reason to switch.
Consistency Principle: Explanation
Sometimes, an accountant has to deal with issues that can be handled by a variety of principles (e.g., depreciation on fixed assets, valuation of stock, etc). This principle stresses that the accountant should select one approach and apply it consistently.
The ruling about consistency applies where a change in approach could affect the profit of a business.
However, this does not mean that changes can never be made. Any reasonable change to improve the work of accounting is permitted, but an appropriate note to explain the change must be written to make it clear.
Often, there is more than one correct way to complete a task.
For example, there are many viable methods of calculating depreciation on fixed assets. A business can choose any of them to compute depreciation for any assets without contravening any accounting principles or concepts.
However, in this example, whatever method is chosen for the purpose of depreciation must be consistently used for the same class of assets year after year.
The objective of this principle is to ensure that the performance of different years can be measured and judged on the same basis year after year.
For example, if a business uses the straight-line method to calculate depreciation on its motor vehicles in 2015 but changes the method to the declining balance approach for the next year, the accounts for these two years will not be comparable.
While the consistency principle essentially refers to having an unchanged basis of accounting from one financial year to another, it also has another important aspect.
This involves being in line with whatever accounting principles, standards, and concepts are in use within other business units in similar 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, income recognition, or treatment of research expenditure.