Accounting and Finance Foundations

Unit 5

Accounting and Finance Foundations Unit 5: Accounting Terminology 316

Accounting Terminology

Chapter 12

11. Consistency Principle
    Once an entity decides on one method of reporting (e.g., method of accounting for inventory), it
    must use that same method for all subsequent events. In addition, companies should follow the
    accounting procedures that align with their industry practices.
    The consistency principle ensures that differences in financial position between reporting periods
    are a result of changes in the operations and not changes in the way for which items are account-
    ed. In order for financial statement users to be able to compare an organization’s financial state-
    ments from different time periods, consistent accounting policies and procedures must be applied
    by the organization at all times.


12. Conservatism Principle
    The conservatism principle requires an organization to select the accounting method that is least
    likely to overstate assets (revenues) and understate liabilities (expenses) in the current period.
    When choosing between two solutions or accounting methods, the one that is least likely to over-
    state cash, revenue, or other assets should be selected.

By understanding and applying these principles, you will be able to read, prepare, and compare financial

statements with clarity and accuracy. The bottom line is that the ethical practice of accounting mandates

reporting income as accurately as possible and when there is uncertainty, choosing to err on the side of

caution.

Student Guide