Consistency and Conservatism Concept-Better Safe than Sorry

Consistency Concept – The accounting information provided by the financial statements would be useful in drawing conclusions regarding the working of an enterprise only when it allows comparisons over a period of time as well as with the working of other enterprises. Thus, both inter-firm and inter-period comparisons are required to be made. This can be possible only when accounting policies and practices followed by enterprises are uniform and are consistent over the period of time.

For example if a company has adopted for one year method of straight line depreciation and in another year it changes it to written down value method then profit for those two years cannot be compared as the change in method of depreciation will affect the profits to a great extent and hence proper conclusion can’t be drawn.

Conservatism Concept – The concept of conservatism requires that profits should not to be recorded until they are realized but all losses, even those which may have a distant possibility of happening, are to be provided for in the books of account. Hence in other words this concept ensures that profits are not overstated at the same providing for all the possible losses so that company is in better position for facing abnormal losses.

For example company tends to provide more provision for bad debts from its debtors then required in order to be on safe side. Conservatism holds that in financial reporting it is preferable to be pessimistic than optimistic.

1 comment… add one
  • Jerry

    I loved your website keep it up

Leave a Comment

Related pages

reducing balance method of depreciationtraditional subsistence economyexample of cost push inflationconsignee consignorfull form of cfaqualified and unqualified audit reportswhat is the journal entry for prepaid expenseshorizontal and vertical analysisvertical analysis of the balance sheetunearned rent incomeconcept of materiality in accountingexamples of assetswhat is tariffs and quotasinferior vs normal goodwhat are the pros and cons of international tradevertical horizontal and conglomerate mergerswhat is a floating currencyexamples of job costing and process costingmarginal costing systemwhat is inferior goods in economicsadvantages and disadvantages of promotional pricingadvantages of payback period methoddisadvantages of variable costingeffect of advertisement on monopolistic competitionwhat are cash inflowsratio analysis advantagesunsystematic risk examplescash reserve ratio calculationcost pludifference between account payable and account receivabletrial balance is preparedconglomerate mergersbenefits of oligopolynet worth calculation of companylimitation of capital budgetingdecentralization advantagesdiscounting billdrawbacks of globalisationadvantages and disadvantages of loan capitalwholesale transaction bankingwhat is a profitability ratiodefine durable goodautocratic leadership stylesdisadvantages of commodity exchangedemerits of industrializationwhat is the meaning of traditional economydefine shareholdingdifference between fdi and fiifinancial markets typesdifference between cash credit and bank overdraftwhat is crr slrcharacteristics of job costingdisadvantage of international tradewhat is capm in financewhat is the difference between a quota and a tarifffeatures of monopoly in economicsadvantages and disadvantages of financial institutionsadvantages and disadvantages of delegation in managementwhat are disadvantages of capitalismdemerits of industrializationwhat are the advantages and disadvantages of decentralizationmaximum market skimmingwhat are the disadvantages of international tradebills of discountingadvantages and disadvantages of internet bankingobjectives of demat accountdifference between overdraft and term loandisadvantages of stocksimplicit and explicit cost in economicsdifference between tariff and taxwhat is pre opening session in stock marketconsigner meanstypes of mergers and acquisitions with examples pptwhat does perpetual succession meanmixed economy advantages and disadvantagesaccounts receivable and unearned revenueadvantages and disadvantages of hedge fundscharacteristics of a autocratic leaderadvantages and disadvantages of urban and rural lifeautocratic supervisionadvantages & disadvantages of globalisation