Question 20 of 23intermediate💡 UnderstandLong Answer5 marks

Why is it important to adopt a consistent basis for the preparation of financial statements? Explain.

Correct Answer

It is important to adopt a consistent basis for the preparation of financial statements for the following reasons:

1. Facilitates Inter-Period Comparisons: Consistency allows comparison of financial performance over a period of time. For example, an investor can compare the current year's net profit with the previous year. If accounting policies, such as depreciation methods, differ between years, the profit figures will not be comparable. Consistency ensures that results of two accounting periods are comparable.

2. Enables Inter-Firm Comparisons: Comparison between the financial results of two enterprises is meaningful only when the same kind of accounting methods and policies are adopted. Uniform and consistent accounting practices make it possible to assess how a firm has performed compared to other firms.

3. Eliminates Personal Bias: Consistency eliminates personal bias in the valuation of items like stock and helps in achieving objective and comparable results.

4. Ensures Reliability: For accounting information to be meaningful to internal and external users, it must be reliable as well as comparable. Consistency in accounting policies, principles, and practices throughout the accounting process ensures this reliability.

However, consistency does not prohibit change in accounting policies. Necessary changes are permitted but must be fully disclosed in the financial statements along with their probable effects on financial results.

Exercise: Questions for Practice - Long Answers | Q: 2 | (Page 20)
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Explanation

This answer is based on the Consistency Concept explained in Chapter 2 of the NCERT Accountancy textbook. The concept emphasizes that accounting information becomes useful only when it allows comparisons—both over time (inter-period) and with other enterprises (inter-firm). The textbook uses the example of depreciation methods to illustrate how inconsistent policies can make profit figures incomparable. The answer also clarifies the misconception that consistency means no changes are allowed—changes are permitted but must be disclosed properly.

Solution Steps

  1. Step 1: Identify the main purpose of consistency - enabling comparability of financial information

  2. Step 2: Explain inter-period comparison - comparing current year with previous years

  3. Step 3: Explain inter-firm comparison - comparing with other enterprises

  4. Step 4: Mention elimination of personal bias as a key benefit

  5. Step 5: Clarify that consistency permits changes with proper disclosure

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