GAAP_Consistency Principle 一般公认会计原则

GAAP-Consistency Principle

This discussion focuses on the objectives, description and application of this principle. Examples will be given to strengthen the understanding and capability to apply this principle at real situation.

Objective:

To emphasize the importance and value of comparability of financial information. Description:

- Similar transactions should be subjected to the same accounting treatment.

- Accounting Concepts applied every year should be consistent

Application:

The nature of accounting is actually very flexible. This feature has been further strengthened by the set of accounting standards, which provide “only” the framework on the development, recording and presentation of accounting information, rather than “controlling” every single step of the process.

However, every story has 2 sides! When there are advantages, in no doubt, there will be disadvantages.

One of the disadvantages in regard to the “flexible” nature of accounting is the possibility that organizations can apply different accounting methodologies for the same kind of calculation.

For the following examples, please be noted that 3 common methods of depreciation are widely applied in the industry (namely straight-line; reducing balance; sum-of-the-years’-digit).

Example 1:

Your company has purchased a machinery at $120,000 and expect that it can be used for 10 years, with no residual value at time of disposal. In Year 1, your management and accountant have decided to apply the straight-line depreciation method.

Entries:

Dr Depreciation Expenses $12k*

Cr Accumulated Depreciation $12k*

* ($120k / 10Years) – Straight-line depreciation

In Year 2, your company also purchased a machinery at $120,000 and expect that it can be used for 10 years, with no residual value at time of disposal. However, in this year, your management and accountant have decided to apply the sum-of-the-years’-digit method for this new machinery.

Entries:

Dr Depreciation Expenses $19.6k**

Cr Accumulated Depreciation $19.6k**

*($120k / (9/55)) – Sum-of-the-years’-digit depreciation

To “simplify” the situation, assuming that the company earns $100,000 in both year 1 and year 2 + there are NO other expenses in both years, except depreciation. Then, Net Income (Revenue – Expenses) for

Year 1 = $(100 – 12)k = $88k;

Year 2 = $(100 – 19.6)k = $80.4k

Can you conclude that Year 1 is MORE profitable than Year 2?

Ans: NO!

Why?

Ans: Because you’re not comparing apple-to-apple.

This situation is very similar to the fact that if I compare your class based on e.g. “Mid-Term Exam”, “Quiz” and “Final Exam”, while at the same time, evaluate another class by the “Mid-Term Exam” ONLY. Then is it feasible to comment at the end of the semester which of your 2 classes are doing better?

Ans: NO!

Why?

Ans: Because different evaluation criteria has been applied to evaluate the performance of your 2 classes.

Final Comment:

Consequently, even though the accounting standards “allow” the management to choose