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Unit 13: Critical Evaluation of Principles and Practices

profitability of the business. If you want to increase the profits, you can show the sales but not Notes
the expenses and vice versa if you want to reduce the profits for any given period. Therefore, the
matching principle is applied by first determining the items that constitute revenues for the
period and their amount in accordance with the conservatism concepts and then matching items
of cost to these revenues. The only problem is to determine which costs match with these
revenues and hence, are expenses for the period.

13.2.10 The Consistency Concept

The accounting policies and methods followed by the company should be the same every year.
The consistency concept states that once an entity has decided on one method, it should use the
same method for all subsequent events of the same character unless it has a sound reason to
change the method. This is done because frequent changes in the manner of handling same type
of events, would make it very difficult for the external users to compare financial statements
over different periods. The term consistency as used here refers to consistency over a period of
time and not the logical consistency. The external auditors have to specify in their reports if the
company is changing any of its policies or methods and the effect of these changes on the
reported figures.

13.2.11 The Materiality Concept

Insignificant events would not be recorded if the benefit of recording them does not justify the
cost.
In law, there is something called ‘de minimis non curat lex’, which means that the court will not
consider trivial matters. Similarly, the accounting does not attempt to record events so insignificant
that the work of recording them is not justified by the usefulness of the results. For example, when
the pencils are issued to the employees they are written off as expenses even though when they
may be used over a period of time and are assets of the organisation. This is done because keeping
a track of the use of the pencil would require more expenses and does not serve any real purpose,
as the value of the item is too small. In other words, insignificant events will be clubbed together
and recorded because the organisation has to account for every single paisa.
The line separating material events from immaterial events is so thin that the decision depends
only on judgement and common sense. The guiding force is to look at the expense in the light of
the total expense and see whether any real benefit could be served by going into the details of
that item. The concept is very useful when estimating the costs associated in any particular
accounting period and revenues. Because many of them would not be very close estimates and
it may not be worthwhile to attempt to refine these estimates and make these more exact.
But you should remember that there is no definitive rule that separates material information
from immaterial information. So, the materiality concept may be taken to mean that although
insignificant events may be disregarded but there must be full disclosure of all-important
information.

13.2.12 The Objectivity Concept

An evidence of the happening of the transaction should support every transaction. The objectivity
principle means that financial information is supported by independent and unbiased evidence.
It involves more than one person’s opinion. Information is not reliable if it is based only on
preparer’s perception. A preparer can be too optimistic or pessimistic. An unethical preparer
might even try to mislead users by intentionally misrepresenting the truth. The objectivity
principle is intended to make financial statements useful by ensuring that they report reliable
and verifiable information.

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