Accounting procedures and accounting practices should remain same from year to year under which of the following accounting principles:
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Solution
The correct option is D Consistency Principle
The consistency principle states that, once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods.
In accounting, the convention in consistency is a principle that the same accounting principles should be used for preparing financial statements over a number of time periods.[1][2] This enables the management to draw important conclusions regarding the working of the concern over a longer period.[3] 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.
Alterations in procedure[edit]
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.
Types of consistency[edit]
Consistency may be of three types:[4]
- Vertical consistency
- Horizontal consistency
- Third dimensional consistency
The vertical consistency is maintained within inter-related financial statements of the same period. If a change has been made in dealing with two aspects of the same statement then it will be vertical inconsistency. For example, if one method of depreciation is used while preparing profit and loss account and another method is followed while preparing balance sheet, it will be a case of vertical inconsistency. When figures of one financial year are compared with the figures of another financial year of the same organization it will be a case of horizontal consistency. Third dimensional consistency will arise when financial statements of two different organizations, in the same industry, are compared.[5]
References[edit]
- ^ Banerjee, BK (2013). Financial Accounting : Concepts, Analyses, Methods And Uses. PHI Learning. p. 172. ISBN 9788120339507. Retrieved 30 August 2014.
- ^ Sweeny, Allen (1996). Accounting and Financial Fundamentals for NonFinancial Executives. AMACOM. pp. 31, 93. ISBN 9780814415856. Retrieved 30 August 2014. Convention of consistency.
- ^ Mohana Rao, Peddina (2010). Financial Statement Analysis And Reporting. PHI Learning. p. 85. ISBN 9788120339491. Retrieved 30 August 2014.
- ^ Rajasekaran, V; Lalitha, R (2010). Financial Accounting. Pearson Education India. p. 24. ISBN 9788131731802. Retrieved 30 August 2014.
- ^ Accounting and Financial Management; 2003; Gupta Shashi K., Sharma R.K; Kalyani publishers B-I/1292, Rajinder Nagar, Ludhiana-141 008; p 2.8-2.9
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (G.A.A.P)
GAAP is an international convention of good accounting practices. It is based on the following core principles. In certain instances particular types of accountants that deviate from these principles can be held liable.
The Business Entity Concept
The business entity concept provides that the accounting for a business or organization be kept separate from the personal affairs of its owner, or from any other business or organization. This means that the owner of a business should not place any personal assets on the business balance sheet. The balance sheet of the business must reflect the financial position of the business alone. Also, when transactions of the business are recorded, any personal expenditures of the owner are charged to the owner and are not allowed to affect the operating results of the business.
The Continuing Concern Concept
The continuing concern concept assumes that a business will continue to operate, unless it is known that such is not the case. The values of the assets belonging to a business that is alive and well are straightforward. For example, a supply of envelopes with the company's name printed on them would be valued at their cost. This would not be the case if the company were going out of business. In that case, the envelopes would be difficult to sell because the company's name is on them. When a company is going out of business, the values of the assets usually suffer because they have to be sold under unfavourable circumstances. The values of such assets often cannot be determined until they are actually sold.
The Principle of Conservatism
The principle of conservatism provides that accounting for a business should be fair and reasonable. Accountants are required in their work to make evaluations and estimates, to deliver opinions, and to select procedures. They should do so in a way that neither overstates nor understates the affairs of the business or the results of operation.
The Objectivity Principle
The objectivity principle states that accounting will be recorded on the basis of objective evidence. Objective evidence means that different people looking at the evidence will arrive at the same values for the transaction. Simply put, this means that accounting entries will be based on fact and not on personal opinion or feelings.
The source document for a transaction is almost always the best objective evidence available. The source document shows the amount agreed to by the buyer and the seller, who are usually independent and unrelated to each other.
The Time Period Concept
The time period concept provides that accounting take place over specific time periods known as fiscal periods. These fiscal periods are of equal length, and are used when measuring the financial progress of a business.
The Revenue Recognition Convention
The revenue recognition convention provides that revenue be taken into the accounts (recognized) at the time the transaction is completed. Usually, this just means recording revenue when the bill for it is sent to the customer. If it is a cash transaction, the revenue is recorded when the sale is completed and the cash received.
It is not always quite so simple. Think of the building of a large project such as a dam. It takes a construction company a number of years to complete such a project. The company does not wait until the project is entirely completed before it sends its bill. Periodically, it bills for the amount of work completed and receives payments as the work progresses. Revenue is taken into the accounts on this periodic basis.
It is important to take revenue into the accounts properly. If this is not done, the earnings statements of the company will be incorrect and the readers of the financial statement misinformed.
The Matching Principle
The matching principle is an extension of the revenue recognition convention. The matching principle states that each expense item related to revenue earned must be recorded in the same accounting period as the revenue it helped to earn. If this is not done, the financial statements will not measure the results of operations fairly.
The Cost Principle
The value recorded in the accounts for an asset is not changed until later if the market value of the asset changes. It would take an entirely new transaction based on new objective evidence to change the original value of an asset.
There are times when the above type of objective evidence is not available. For example, a building could be received as a gift. In such a case, the transaction would be recorded at fair market value which must be determined by some independent means.
The Consistency Principle
The consistency principle requires accountants to apply the same methods and procedures from period to period. When they change a method from one period to another they must explain the change clearly on the financial statements. The readers of financial statements have the right to assume that consistency has been applied if there is no statement to the contrary.
The consistency principle prevents people from changing methods for the sole purpose of manipulating figures on the financial statements.
The Materiality Principle
The materiality principle requires accountants to use generally accepted accounting principles except when to do so would be expensive or difficult, and where it makes no real difference if the rules are ignored. If a rule is temporarily ignored, the net income of the company must not be significantly affected, nor should the reader's ability to judge the financial statements be impaired.
The Full Disclosure Principle
The full disclosure principle states that any and all information that affects the full understanding of a company's financial statements must be include with the financial statements. Some items may not affect the ledger accounts directly. These would be included in the form of accompanying notes. Examples of such items are outstanding lawsuits, tax disputes, and company takeovers.
INTERNATIONAL FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS
GAAP
G.A.A.P.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES