There are a few foundational accounting principles you should be aware of if you’re handling your small business’s books, and the consistency principle is an especially important one when it comes to having your books audited. As the name implies, this principle has to do with being consistent in your company’s bookkeeping. But why is this important, and how does this play out in your small business accounting?
The Consistency Principle: An Introduction
Simply put, the consistency principle (also known as the consistency concept) is the idea that you should use the same accounting methods and principles in a consistent manner throughout your company’s books. Similar transactions or events should be recorded in the same way from one accounting period to the next. If you do need to make a change to the accounting methods or principles used for a valid reason (more on that a bit later), then this change needs to be duly accounted for in your company’s financial statements.
Why is Consistency Important?
You may be wondering why maintaining consistency across your company’s accounting records is so important, especially if you’re running a smaller operation and handling your books in-house, not through a dedicated accounting department. Well, not only does sticking to the consistency principle make things more straightforward for you when it comes to maintaining your company’s books and referencing past statements, but it’s definitely something that anyone (friend or perceived foe) auditing your books will be checking for.
An auditor will want to ensure that you’re following the same accounting principles and methods from one period to the next (and properly noting any change to these principles and methods). Otherwise, the readers of your financial statements (creditors, stakeholders, inquisitive revenue departments) won’t be able to make accurate comparisons between one statement and the next. Comparability is key here: in order to get a clear picture of your company’s financial position and performance over time, anyone reading your financial statements needs to know that the information over multiple statements is easily comparable.
How are Changes Noted?
The main place where you will need to disclose any changes to your company accounting will be in the footnotes of your financial statements. What information do you need to include in this disclosure? You’ll need to clearly lay out what change took place (which new accounting method was adopted for a particular type of transaction, for example), the effect this change had on your financial records, and the date the change came into effect. This kind of clear disclosure is a quality that the Financial Accounting Standards Board (FASB) emphasizes when it comes to the information presented in a company’s financial statements.
Changing Accounting Methods
While consistency is important, you’re not expected to stick with one accounting method or principle forever just because you started out using it. Businesses grow and change, and sometimes it will be in your best interests to modify your bookkeeping to reflect that. Keep in mind that any change has to be done on reasonable grounds, and the reasoning behind the decision to make the switch has to be explained in your financial statement footnotes. Adapting your accounting methods to keep pace with growing demand for your company’s product or service would be a valid reason. Switching between accounting methods to minimize taxable income would be considered an unwarranted change, and a violation of the consistency principle.
If you’re unsure whether taking on a new accounting method or principle is the right path to take (or are unsure what methods and principles to apply at the outset), it can’t hurt to consult with an accounting professional. (Remember: this post is meant for informational purposes, not legal advice!)