The concept of accounting consistency refers to the principle that companies should use the same accounting methods to record similar transactions over time. In other words, companies shouldn’t bounce between accounting rules and treatments to manipulate profits or other financial statement elements. Accounting methods should be used consistently.
Accounting consistency applies to the quality of accounting information because it allows end users to understand and compare financial statements. Think of it this way. If a company changed accounting treatment for its accounts receivable every single year, it would be difficult to compare the prior years’ accounts receivable balances with the current year. Since each year follows a different rule or standard, each year wouldn’t be able to be compared.
This means that both ratio analysis and trend analysis wouldn’t be available for investors and creditors to help gauge the company’s current performance. GAAP does allow companies to change accounting treatments when it is reasonable and justifiable. Companies are not allowed to change from one method to another in a current year then back to the previous method the following year. This would contradict the consistency concept.
– Todd’s restaurant sells gift certificates during the holidays every year. When these gift certificates are sold, Todd sometimes credits a sale and sometimes he credits a gift cards payable account. Todd decides what to credit at the end of the month when his income numbers come in. If he needs more income, he credits sales. This is a clear violation of the accounting consistency concept. By not accounting for the gift cards consistently, Todd makes the financial statements misleading.
– Assume our example above except now Todd has decided to change is method of accounting from using both sales and gift cards payable to only accounting for his gift cards in a payables account. This change in accounting method is perfectly fine. Todd is changing from a non-GAAP appropriate method to an approved method of accounting.
– Denise’s Fine Jewelry uses the FIFO method for valuing their inventory. Denise made the most profit this past year than any other year in her business. Unfortunately, now she will owe a large amount of taxes. To minimize her taxes, Denise wants to switch to the LIFO inventory method. This switch is fine as long as Denise continues to use the LIFO method into the future doesn’t switch back to the FIFO method.