Consistency principle

As briefly discussed in the chapter “characteristics of financial information”, consistency is one of the qualitative characteristics of useful financial information. Consistency principle requires that accounting policies and methods adopted by an entity are consistently followed and are only changed if there is a reasonable basis for changing.

In accounting, there are various methods to do accounting for various areas. For instance, you can value your inventory following FIFO method or weighted average cost method. Similarly, you can depreciate your fixed assets using straight line method or reducing balance method. Based on the circumstances of each entity, any accounting policy which is allowed by the accounting standards can be adopted, but once adopted, the entities should follow these policies consistently in future.

If there is a need to change the accounting policy as the entity thinks that it will result in better representation of the facts, then the change in accounting policy must be clearly disclosed in the financial statements along with the reasons for change and its effect on the financial statements. It is important to understand the reason for this accounting principle. Just think about the decision-making needs of users! For instance, some investors are thinking about investing in real estate projects. They have options from various real estate management companies. Before deciding, the investors will compare and evaluate various options available and if one of the entity’s information is not comparable to other entities, they will most likely ignore that option and compare the rest of the options.

So, the point is, comparability is required for financial information to be useful and following consistency principle is vital to achieve comparability in financial information.