What is Consistency Principle Or Concept

May 14th, 2006 Comments off
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CONSISTENCY PRINCIPLE OR CONCEPT

·      Once a business has adopted 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

 NOTES:

This concept advocates that there must be consistent treatment for similar items within each accounting period and from one period to the next.

ILLUSTRATION NO.1

Company A has received annual rebates from its supplier approximately to $1 million. Every year, it is the company’s accounting policy to net these rebates against the purchases from the suppliers. But for this year, this is taken up as income.Question: Is this correct ?Answer: Under the consistency concept, this is not correct as every year the Company A has been taking these rebates against the purchases but all of a sudden, it changes its accounting policy by taking up as revenue.

ILLUSTRATION NO.2

Every year, Company A has been using the straight line depreciation method of 33% years for its computers but suddenly for this current year, it started to depreciate using a rate of 5%.Question: Is this correct?Answer: Again, basing on this concept, Company A is wrong as there is no consistency in its accounting approach.

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