Consistency Concept
May 14th, 2006
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CONSISTENCY CONCEPT |
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· 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 |
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NOTES: |
| This concept advocates that there must be consistent treatment for similar items within each accounting period and from one period to the next. |
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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. |
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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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