Consistency

Indian financial accounting system is based on Generally Accepted Accounting Principles abbreviated as GAAP. It is a set of principles and standards followed commonly in India to ensure transparency and consistency across the board. One of the principles under this collection of rules is the Consistency principle. This principle states that the business should apply the accounting principles consistently throughout all transactions. This principle measures the trends in business activities across different financial periods. Through this principle, manipulation in books of accounts can be prevented and easily compared with historical books. 

What is the Principle of Consistency?  

As per the principle of consistency, all accounting transactions and treatments should be followed constantly to make the financial statements and sheets comparable across all books. Businesses should consistently follow the assumptions taken to prepare the books in each accounting year. Suppose an entity desires to change the books’ consistency, i.e., assumptions and policies. In that case, the business should demand that change or required by law or to enhance the preparation and presentation of books of accounts.  

If the change is due to any other reason, it should be stated clearly. The management should write the effect of the change on books and the nature of the difference. The changes should necessarily be disclosed in the financial statements to inform and attract the users of the reports. The disclosure allows the users to understand and analyze the difference in the profits.  

Importance of Consistency Principle 

Some of the reasons why the consistency principle is important are because –  

• Accountants can easily prepare financial statements with consistent record-keeping methods

• Auditors can compare the financial statements hassle-free with that of past years  

• Stakeholders can rely on the financial statements as they have known the format and policies from past accounting years

• Decision-making is fast and smooth due to the similar structure of statements

Usage of Consistency Principle 

This accountancy principle is utilized in all industries, from manufacturing to service. All entities have to maintain regular books of accounts, which requires continuously following policies and assumptions. This principle is among the fundamental guidelines of basic accounting in India. Due to this, the same set of policies, regulations, and assumptions are being followed year after year, unless otherwise a new change is highlighted or made in the books. The consistency and continuity of the statements ease the preparation and accelerate the comparison procedure.  

Also, this principle is used in all kinds of industries to ensure that all the policies and assumptions of financial accounting are continuously implemented. If a new change is made now and then, the statements are inaccurate and may not reflect the heavy profit fluctuations correctly. Therefore, to make the lives of accountants easy, the consistency principle is followed strictly and thoroughly.  

Advantages of the Consistency Principle 

Some of the advantages of using the consistency principle as a part of accounting policies for any business organization are –  

1. Simplify Accounts and Audits – If the financial statements and assumptions are recorded with the same rules and policies, it allows the accountant to simplify recording the monetary transactions in the books. Also, it enables the auditors to trust the assumptions and principles with which the books have been prepared due to their consistency across the past accounting years.  

2. Comparable Financial Books – If the business organization follows the same set of principles and assumptions from the initial days, the auditor can quickly compare the books and the transaction during the accounting year. Also, the business stakeholders who use these financial statements can easily compare them to make a financial decision about the business.  

3. Decrease in Training Cost – If the business is continuously following the same accounting principles and policies, the cost of training is reduced. As the department need not train the accountants and employees repeatedly. The initial training is sufficient to learn and manage the books.  

4. Accelerate Management – When the business has been following a constantly specific set of accounting principles, the management becomes habituated to procedures, treatments, technologies used, and the effects of the treatment on the books. Consistent books allow them to make faster and more smooth decisions for the business.  

Disadvantages of the Consistency Principle 

Following are some of the disadvantages of the principle of consistency – 

1. The error of Judgement- This principle only allows the business organization to change the accounting principles if the change enhances the presentation and preparation of the statements. However, these changes are suggested based on forecasting and research – which may not always be correct. Unclear changes give rise to an error in judgment, which may not go down well with the financial statements and lead to problems.  

2. Permission to make Changes – To make changes in the rules and assumptions of the financial system of the business, the consent needed is not easy. The new changes put the accountants and the auditors under pressure to change the treatments and calculations even though the difference is for the betterment of the preparation and presentation of the financial statements.  

3. Restriction of Policies – This principle restricts the business organization to the same set of rules and assumptions year after year to prepare its financial statements. Even if a new technology comes in demand until the accountant and auditor want to change, management can’t do anything.  

The principle of consistency is crucial for any business organization, whether big or small, government or private organization – all the registered entities need to follow this principle to prepare and present their financial statements in every accounting period. These principles are constantly and continuously followed to make the work of accountants and auditors simple. Any change has to be entirely disclosed with its effect on the financial statements if there is any change.