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The consistency convention implies that same accounting procedures will be used for similar items over time. If the income statement for the current period shows higher earnings than the preceding period, the user is entitled to assume that business operations have been more profitable provided there is no change in the accounting procedures adopted by the enterprise. The business entity should be consistent in the accounting practices or principles in respect of the assets, equities, revenues and expenses. It is only when the accounting principles are uniformly followed from year to year that the results obtained will be comparable. The rationale for this concept is that frequent changes in accounting treatment would make the Balance Sheet and the Income Statement unreliable to end-users. There are many instances in which a change in accounting procedures may bring different results. For instance, the inventory valuation may be done either on First-in, First-Out (FIFO) basis or Last-in, First-Out (LIFO) basis. In FIFO method, older costs are charged to the cost of the goods sold whole more recent costs are identified with the inventories at the end. On the other hand, in LIFO, more recent costs are identified with inventories at the end. A change in method may bring about considerable influence on the income reported as well as on the inventory cost for the Balance Sheet. Further, a change from cash basis to accrual or mercantile basis would also bring about significant changes in the Income Statement and the Balance Sheet. Eric L. Kohler mentions three types of consistencies –

Vertical Consistency:

It is to be found within an inter – related group of financial statements bearing the same date. A lack of vertical consistency would occur when fixed assets have been shown at appreciated price while in the interrelated income statement, depreciation has been charged on the cost of the asset. The reverse situation also might occur – assets valued at historical cost while depreciation is based on replacement cost.

Horizontal Consistency:

This consistency is to be found between financial statements from period to period and thus enabling the comparison of performance of the business entity in one year to be made in the subsequent year.

Third Dimensional Consistency:

This type of consistency assists in making comparison of the performance of one business entity with the other business entity in the same trade and on the same date. The consistency principle does not mean that a particular method of accounting once adopted can never be changed. Accounting being social science, there is a scope for desirable changes as a result of changes in a change is desirable, it should be fully disclosed in the financial statements along with its effect in terms of rupee amounts on the reported income and financial position of the year in which that change is made. “Consistency serves to eliminate personal bias and to even out personal judgment but it must not become a fetish so as to ignore changed conditions or need for improvements in techniques.”

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