Consistency concept, Accounting Basics

Consistency Concept

In practice, there are some manners to record an event or a transaction in the books of account. For illustration, the trade discount on raw material purchased might be deducted from the cost of goods and net amount entered in the books, or otherwise trade discount may be demonstrated as the income along with full cost of raw material purchased entered in the books. Likewise, there are some methods to charge depreciation that is reduce in the value of assets caused through wear and tear, and passage of time on an asset or may be of valuing inventory. The consistency concept needs that once a company has decided in one method and has utilized it for several times, it must continue to follow similar method or procedure for all subsequent events of similar character unless it has a sound cause to do otherwise. If for suitable reasons the company creates any departure from the method this has been subsequent so far, then the effect of the change should be clearly stated in the financial statements in the changing year.

You will appreciate the much of the utility of accounting information lies in the actuality that one could draw valid conclusions by the comparison of data drawn from financial, statements of one year along with data from the other year. Comparability is necessary; hence trends or dissimilarities may be identified and evaluated. Inconsistency in the application of accounting methods might significantly influence the reported profit and the financial position. Moreover, inconsistency also opens the door for manipulation of reported assets and income. The comparability of financial information based largely upon the consistency with that given class of events is handled in accounting records year after year.

Posted Date: 4/3/2013 5:55:30 AM | Location : United States

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