What is Consistency Principle?
The consistency principle states that business should maintain the same accounting methods or principles throughout the accounting periods, so that users of the financial statements or information are able to make meaningful conclusions from the data.
Consistency principle is useful for measuring trends in the business which is spread across many accounting periods. If the business keeps on changing accounting methods, it will create confusion and the financial statements will not be comparable across accounting periods.
Importance of Consistency Principle
Consistency principle is important for a business both from accounting and auditing point of view as having a consistent set of accounting principles, procedures helps accountants in recording business transactions in an orderly manner.
While in the case of auditors, it helps comparing business data much easier as the same accounting methods are followed consistently.
It also provides the stakeholders and shareholders with a sense of satisfaction that the performance of the business can be tracked using a tried and tested accounting methodology which gives consistent results.
The accuracy of the provided information can be assured as there is no change when following consistency principle, which enables shareholders and management in making better business decisions.
Advantages of Consistency Principle
Following are some of the advantages of the consistency principle
1. It helps accountants in recording of financial transactions and managing the company accounts in a better way.
2. It enables auditors to perform comparative analysis on the financial performance of the business by taking into account data obtained from different accounting periods.
3. It makes the management familiar with the accounting principles and practices and therefore is in a better position to make business decisions.
4. Following a consistent accounting principle helps reduce the need for training of the staff which reduces the training cost.
5. Consistency in accounting principles is helpful in performing comparative study of the financial performance of the business.
Disadvantages of Consistency Principle
Following are some of the disadvantages of the consistency principle:
1. It restricts the use of new and more advanced methods of accounting to be followed by the business as the financial records are updated using outdated accounting principles that makes it difficult to adopt the new methods due to this principle.
2. It can result in judgement errors as the decision by management in changing accounting methods may or may not yield positive results.
This was all about the topic of consistency principle, which is an important topic of Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.
Important Topics for Accountancy: