Consistency Principle Definition, Example How it Works?

In response, the federal government, along with professional accounting groups, set out to create standards for the ethical and accurate reporting of financial information. Many reputable accounting degree programs teach generally accepted accounting principles as part of their curricula. This guide for accounting students explores GAAP standards and how they continue to evolve in a changing economy.

GAAP Principles: Consistency Example

Due to the increasing cost of its materials, it concludes that LIFO will better indicate the company’s true profit. In the year of the change from FIFO to LIFO (and in years when comparisons are presented), the company must disclose the break in consistency. – Ed’s Lakeshore Real Estate buys software licenses for its property listing programs every year.

Can you explain the Principle of Continuity and its impact on asset valuation?

The United States uses a separate set of accounting principles, known as generally accepted accounting principles (GAAP). The Principle of Continuity, alternatively referred to as the Going Concern Assumption, posits that a business will sustain its operations into the foreseeable future. This assumption impacts asset valuation by allowing assets to be valued based on their continued use in the business rather than on their liquidation value, which might be lower. This principle provides a more realistic valuation of assets in the normal course of business. The four basic principles of GAAP include the Revenue Recognition Principle, Matching Principle, Full Disclosure Principle, and Cost Principle. These foundational principles guide preparing and presenting financial statements, ensuring they are accurate and consistent.

Example: GAAP Principal of Continuity

It aids in understanding how inventory management and pricing strategies impact the company’s gross margin and overall profitability. This type of back and forth causes the financial statements to be incomparable and useless for trend analysis. But, the company subsequently wants to change its accounting policies from a straight line to a declining balance. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.

• The Principle of Continuity, alternatively referred to as the Going Concern Assumption, posits that a business will sustain its operations into the foreseeable future.
• It ensures that all significant financial information, which could influence the decision-making process of users of financial statements, is comprehensively disclosed.
• GAAP prepared financial statement, looking at inventory, for instance, you know you are looking at a dollar figure, not a number of physical units.
• Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise.
• In Europe and elsewhere, International Financial Reporting Standards (IFRS) are established by the International Accounting Standards Board (IASB).

Conclusion – GAAP Principles: An In-Depth Look at the Accounting Pillars

Although privately held companies are not required to abide by GAAP, publicly traded companies must file GAAP-compliant financial statements to be listed on a stock exchange. Chief officers of publicly traded companies and their independent auditors must certify that the financial statements and related notes were prepared in accordance with GAAP. The Principle of Periodicity mandates that financial activities be recorded and reported over specific, uniform intervals. These intervals are known as accounting periods, which are typically quarters or years. This principle also affects the depreciation of assets and the amortization of intangible assets. Assets are depreciated over their useful lives, reflecting their utility over time.

Governmental Accounting Standards Board

Any reasonable change to improve the work of accounting is permitted, but an the difference between bookkeeping and accounting appropriate note to explain the change must be written to make it clear.

Only change an accounting principle or method if the new version in some way improves reported financial results. If such a change is made, fully document its effects and include this documentation in the notes accompanying the financial statements. Consistency Principle – all accounting principles and assumptions should be applied consistently from one period to the next.

Periodicity Assumption – simply states that companies should be able to record their financial activities during a certain period of time. Monetary Unit Assumption – assumes that all financial transactions are recorded in a stable currency. Companies that record their financial activities in currencies experiencing hyper-inflation will distort the true financial picture of the company. Cost Benefit Principle – limits the required amount of research and time to record or report financial information if the cost outweighs the benefit.