Consistency principle - What is the consistency principle?
The consistency principle states that once you decide on an accounting method or principle to use in your business, you need to stick with and follow this method or principle consistently throughout your accounting periods.
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When doing your accounting, there are a number of different methods or principles that accountants can use. These principles are laid out for businesses to comply with when reporting their financial activity.
Why do we use the consistency principle?
The sole purpose of the consistency principle, or consistency concept, is to ensure that transactions or events are recorded in the same way, from one accounting year to the next.
In other words, businesses should not use a certain accounting method one year, and a different accounting method the next year. This however does not mean that business are required to stick with the same accounting method forever, they are allowed to change their method, but this change will need to be accounted for.
In cases where you might need to change the accounting method or principles that you use in your business for a valid reason, then the effects of this change need to be clearly disclosed in your company’s financial statements.
Accountants are encouraged to use a consistent accounting method from year to year in order to prevent manipulation of financial statements, and so that the business reports are accurate and depict comparable information. .
The importance of the consistency principle
In accounting, the consistency principle holds high importance for a number of reasons. Some of which are the following:
Comparable financial information:
- By using a consistent accounting method from one accounting period to the next, the financial reports will all hold a similar structure. This makes it easier for bankers, managers, creditors, and other stakeholders to compare the performance of the business over different financial years.
- A consistent accounting method can be both cost and time efficient. Accountants and managers will become familiar with the accounting method, and by being consistent, you will only require the initial training for this method.
- Auditors are external individuals who are trained to make sure the accounting data provided by a company corresponds to the activities of that company. Following the consistency principle, auditors will demand reasons for any changes that could affect the interpretation of the financial statements of a business.
How to note any changes to accounting methods
As mentioned earlier, if a business decides to make any changes to their accounting method, this change will need to be disclosed. Normally, businesses will note these changes in the footnotes of their financial statements. The purpose of these footnotes is to clearly present and state the accounting methods and practices of your business, verifying the transparency of your business activities to the readers.
In these notes, businesses will need to clearly lay out what changes took place, the date the change was made, and the effect this change had on their financial reports.
Accounting principles and invoicing
With Debitoor invoicing software, you have the option to use cash or accrual accounting methods for your business, which can be set under account settings. By choosing to follow a cash accounting method your reports will be based on payment dates, which will be reflected in your invoices and other documents you wish to export.