|
CONSISTENCY PRINCIPLE OR CONCEPT |
|
· Consistency principle or concept means that 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 consistency 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 principle or 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 consistency principle or concept, Company A is wrong as there is no consistency in its accounting approach. |
CLICK THIS TO SEE MORE ARTICLES ON ACCOUNTING CONCEPTS & PRINCIPLES