Answer to Question #43107 in Management for Pragash

Question

“The convention of consistency is necessary for making the financial statements comparable” Discuss

Answer 1

The convention of consistency means that same accounting principles should be used for preparing financial statements for different periods. It enables the management to draw important conclusions regarding the working of the concern over a longer period. It allows a comparison in the performance of different periods. If different accounting procedures and processes are used
for preparing financial statements of different years then the results will not be comparable because these will be based on different postulates. The concept of consistency does not mean that no change should be made in accounting procedures. There should always be a scope for improvement but the changes should be notified in the statements. The impact of changes of procedures should be clearly stated. It will enable the readers to analyze information according to new procedures. In the absence of any information regarding the change, it will be presumed that old methods have been used this time also.
Whenever, consistency is not followed this fact may be fully disclosed. For example, if a change in the method of charging depreciation is made or a change is made in the method of allocating overhead expenses to different products, a foot note to the financial statements should be given indicating the extent of change. If possible, net monetary effect of these changes should also be given.