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.

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