Question

(A) Explain the need for consistency in accounting policies and the conditions for a company to change its accounting policy.

Answer 1

The consistency principle of accounting states that a company should use the same accounting policies and the methods for recording similar events or transaction from one financial period to another its is necessary that a company consistently apply its accounting methods and policies from one financial year to another.

Importance or need of consistent accounting policies are as follows:

. This serves as a guide to accountant and management of the company while preparing the financial statements

. They help in providing a ready reference for a similar set of circumstances that the company may come across

. They help in maintaining consistency in the presentation of financial statement which leads to easy comparison from the previous year or with other organisation

. They help in maintaining internal control by following the set procedure for similar kinds of transaction.

. It also help investors in analysis of financial statements while deciding if they should invest in business or not

Conditions for change in accounting policies are :

1. It is required by a law , standard or an interpretation or;

2. Results in the financial statements providing reliable and more relevant information about the effects of transaction, other events or condition on the entity's financial position, its performance or cash flows