Convention of Consistency

The convention of consistency dictates that the same accounting principles should be applied when preparing financial statements from one year to the next. This consistency enables meaningful comparisons of financial statements over time for the same enterprise.

Uniformity in accounting policies and practices across periods ensures that the financial results are comparable.

When different accounting methods are employed in preparing financial statements for various years, the results become non-comparable. Typically, businesses adhere to certain established practices or methods consistently over time. For instance, once a specific method for charging depreciation on fixed assets or valuing unsold stock is chosen, it should be maintained consistently year after year. This allows for proper analysis and comparison of financial statements.

To illustrate, in charging depreciation on fixed assets, an accountant might select either the diminishing value method or the straight-line method and continue with the chosen method each year. Similarly, for valuing closing stock, it can be valued at actual cost, market price, or whichever is lower. However, precious metals like gold, diamonds, and minerals are generally valued at market price.

Thus, the convention mandates the use of the same accounting methods each year in preparing financial statements. However, it does not imply that a particular method of accounting cannot be changed. When a change is necessary, it should be disclosed through footnotes in that year's financial statements.

The significance of the Convention of Consistency includes:

• It enables the comparative analysis of financial statements.

• It ensures consistency in applying depreciation methods to fixed assets and in valuing closing stock

The convention of consistency maintains the reliability and comparability of financial statements over time by adhering to uniform accounting principles, with any necessary changes clearly disclosed.

Read the next article to learn more about the next Convention of Full Disclosure.