Why is it important to adopt a consistent basis for the preparation of financial statements? Explain.
Why is it important to adopt a consistent basis for the preparation of financial statements? Explain.
For making the accounting information meaningful to its internal and external users, it is important that such information is reliable as well as comparable. The comparability of information is required both to make interfirm comparisons, i.e., to see how a firm has performed as compared to the other firms, as well as to make interperiod comparison, i.e., how it has performed as compared to the previous years.
This becomes possible only if the information provided by the financial statements is based on consistent accounting policies, principles and practices. Such consistency is required throughout the process of identifying the events and transactions to be accounted for, measuring them, communicating them in the book of accounts, summarising the results thereof and reporting them to the interested parties. This calls for developing a proper theory base of accounting.
The importance of accounting theory need not be over-emphasised as no discipline can develop without a sound theoretical base. The theory base of accounting consists of principles, concepts, rules and guidelines developed over a period of time to bring uniformity and consistency to the process of accounting and enhance its utility to different users of accounting information.
However, consistency does not prohibit a change in accounting policies. Necessary required changes are fully disclosed by presenting them in the financial statements indicating their probable effects on the financial results of a business.
Hence, it is important to adopt a consistent basis for the preparation of financial statements.
For making the accounting information meaningful to its internal and external users, it is important that such information is reliable as well as comparable. The comparability of information is required both to make interfirm comparisons, i.e., to see how a firm has performed as compared to the other firms, as well as to make interperiod comparison, i.e., how it has performed as compared to the previous years.
This becomes possible only if the information provided by the financial statements is based on consistent accounting policies, principles and practices. Such consistency is required throughout the process of identifying the events and transactions to be accounted for, measuring them, communicating them in the book of accounts, summarising the results thereof and reporting them to the interested parties. This calls for developing a proper theory base of accounting.
The importance of accounting theory need not be over-emphasised as no discipline can develop without a sound theoretical base. The theory base of accounting consists of principles, concepts, rules and guidelines developed over a period of time to bring uniformity and consistency to the process of accounting and enhance its utility to different users of accounting information.
However, consistency does not prohibit a change in accounting policies. Necessary required changes are fully disclosed by presenting them in the financial statements indicating their probable effects on the financial results of a business.
Hence, it is important to adopt a consistent basis for the preparation of financial statements.
