1. Consistency principle
- 1 Importance of Consistency
- 2 Advantages of the Consistency Principle
2. Cost principle
2.2 Purpose of cost Principle
2.3 Exceptions to the Cost principle
The consistency principle states that, once you adopt associate in nursing accounting standard or technique, still follow it systematically in future accounting periods. solely modification Associate in Nursing accounting standard or technique if the re-creation in a way improves reportable monetary results. if such a modification is created, totally document its effects and embody this documentation within the notes related to the monetary statements. The consistency principle is most often unheeded once the managers of a business are attempting to report additional revenue or profits than would be allowed through a strict interpretation of the accounting standards. A telling indicator of such a scenario is once the underlying company operational activity levels don’t modification, however profits suddenly increase.
Importance of Consistency
Auditors square measure particularly involved that their purchasers square measure coverage the monetary statements following the consistency principle. This makes the results from amount to amount comparable for the users of these monetary statements as well as investors and creditors. several auditors can have in-depth discussions with the client’s management team relating to consistency problems within the monetary reports. Associate in Nursing auditor would possibly even refuse to supply its opinion on some client’s monetary statements that square measure in clear violation of the consistency principle.
The consistency principle additionally prevents the management of a corporation from overstating its revenue and profit. If there was no consistency principle in situ, the management may simply manipulate their monetary statements annually victimization completely different accounting methodologies to hyperbolize their performance. for example, it would value more highly to switch from a double-declining balance technique to a wear and tear of depreciation to hyperbolize its profits within the initial years.
Advantages of the Consistency Principle
- Familiarization: By victimization constant accounting strategies and policies, accounting business managers of a corporation can become at home with the method. this can mean that they’re going to solely need to be rained at the start once that they’re going to be ready to perform the monetary coverage tasks systematically day in and outing.
- Cost efficiency: If the accounting policies and methodologies utilized by a corporation in making ready the monetary statements were to vary each amount, this could considerably increase the value of coaching and scale back the potency of the worker. Consistency principle would make sure that workers square measure victimization constant accounting methodologies amount to amount and so they are doing not need to be retrained. Familiarization of the method will increase the potency of the worker.
- Auditor necessities: Most auditors won’t give their opinion on the liableness of the corporate’s monetary statements if they notice that the company has desecrated the consistency principle and haven’t provided enough disclosures or an honest enough principle to try and do therefore.
- Comparable monetary data: Using the consistency principle, a corporation can have the same structure for its monetary statements every amount. this could create it easier for investors, creditors, managers, and alternative stakeholders to check the monetary and operational performance of a business over completely different years.
The cost principle is one in every of the essential underlying tips in accounting. it’s additionally called the historical price principle. the value principle needs that plus be recorded at the money quantity (or the equivalent) at the time that Associate in Nursing asset is nonheritable. Further, the quantity recorded won’t be raised for inflation or enhancements in market price.
The cost principle is a vital side of the commonly Accepted Accounting Principles. Yet, several notice it tough to adjust to the value principle, since past prices don’t enable properly assessing this monetary position of the corporate at the instant. it’s usually argued that recording assets at their current price provides an additional realistic read of a company’s monetary position. However, valuing assets on the idea of their honest market price would produce variety of issues.
Fair price accounting may be tough for each preparers and users of monetary statements. The idea of current price may be understood in numerous ways in which. for instance, if we have a tendency to take a broad definition of this idea, then each the cost and also the quantity that the plus might be sold for may be taken because the current price.
The current price, thus, may be calculated in 2 ways in which, and, consequently, you’ll get 2 fully completely different values. In alternative cases, associate in nursing expert’s opinion is employed to price the plus.
Purpose of cost Principle
This reflection of assets within the business’s reports reduces the necessity for subjective assessment since the quantity got bound assets is typically documented in associate in nursing old school approach or accounting package and may be simply retrieved. To summarize, there square measure many edges of the value principle. Advocates of the historical price principle believe the system to be additional objective, consistent, verifiable, reliable, and comparable. Besides, it’s simple to use as a result of you only got to enter the value within the accounting books. At constant time, this principle is commonly criticized for its quality since the worth of Associate in nursing plus will modification over time.
Exceptions to the Cost principle
There square measure some exceptions to the value principle, chiefly relating to quick assets like debt or equity investments. Investments that may be born-again to make the most the close to future square measure shown on your record at their market price, instead of their historical price. The other exception is assets, that ought to be displayed on your record at their web realizable balance, that is that the balance that you simply expect to receive once the assets balances square measure paid.