Question

Explain consistency concept and conservatism concept?

Answer 1

Answer:

Consistency concept - The consistency principle states that once you decide on an accounting method or principle to use in your business, you need to stick with and follow this method or principle consistently throughout your accounting periods.

Conservatism concept - The principle of conservatism in accounting gives guidance when recording cases of uncertainty or estimates. In other words, you should always lean towards the most conservative side of any transaction.

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Answer 2

Both Consistency Assumption and Conservatism Concept are the Accounting principles.

Explanation:

Consistency Assumption:

• According to the Consistency Assumption, accounting practices once selected and adopted, should be applied consistently year after year.
• The concept helps in better understanding of accounting information and makes it comparable with that of previous years.
• Consistency eliminates personal bias and helps in showing results that are comparable. The concept is particularly important when alternative accounting practices are equally acceptable.
• For example, two methods of charging depreciation, Written Down Value Method and Straight Line Method, are equally acceptable. Under the assumption, method once chosen and applied should be applied consistently year after year to make the financial statements comparable.
• The accounting practice may be changed if the law or Accounting Standard requires it or the change will result in more meaningful presentation.

Conservatism Concept:

• Provide for all anticipated expenses and losses but do not account anticipated incomes and profits.
• Prudence or Conservatism Principle is many a time described using the phrase "Do not anticipate a profit, but provide for all possible losses." Stating differently, it takes into consideration all prospective losses but not the prospective profits.
• The application of this concept ensures that the financial statements do not paint a better picture than what it actually is.
• The Concept of Conservatism needs to be applied with caution and care so that the results reported are not distorted.