The consistency concept in accounting states that a corporation should employ the same accounting principle or procedure it has already adopted in subsequent periods. The consistency idea is crucial because it makes it possible to maintain the comparability of a company’s financial statements throughout time.
Let’s take the case of a business that switches to the accrual method of accounting. Regardless of when the money is actually received, income is recorded when it is generated under the accrual basis. As a result, even when a corporation receives the money in January instead of December, the income would still be recorded in December. Once the organization switches to the accrual basis, it should stick with it going forward. If the company were to switch to the cash basis in January, its financial statements would no longer be comparable to prior periods. Users of financial statements should be aware of the consistency notion since it enables them to compare a company’s financial statements from one period to the next. Without consistency, users would have a difficult time determining whether a company is improving or deteriorating. There are a few exceptions to the consistency concept. First, a company may change its accounting method if the change is necessary by law or regulation.
For example, Sarbanes-Oxley Act of 2002 required organizations to change their accounting for goodwill. Second, an organization may change its accounting method if the change results in more accurate or reliable financial statements. Third, an organization may change its accounting method if the change is for a material item. A material item is one that would have significant effect on an organization’s financial statements.
Consistency concept is a basic accounting principle that is important for financial statement users. By ensuring that companies use the same accounting methods from one period to the next, the consistency concept makes financial statements more comparable and therefore more useful.