Accounting

Comparability in Accounting

Comparability in accounting is what we define as the financial information provided in statements being comparable across different time periods. This is one of the most important aspects of accounting in general. If the financial information provided on statements isn’t comparable, it may point out to a wrongdoing.

All financial statements must be comparable to the next or previous ones so it shows meaningful conclusions. Because of this, the methods used in accounting must be the same in order for the next financial statements to make sense.

For example, assume you sell t-shirts in your store and value them in the inventory based on the FIFO method. If you switch to— let’s say LIFO, everything will be upside down. Because of this, you won’t be able to compare the financial statements from the switch to LIFO from FIFO. This doesn’t necessarily mean that the comparability will be gone forever. There are ways to work this around.

Changes to Accounting Policy

If the changes to accounting policy is a must, the comparability must be ensured. This can be done using many methods. The best thing that can be done if there are changes to accounting policy is disclosing it in the financial statements.

Why changes occur in accounting policies?

A change in the accounting policies of a business can happen for a number of reasons. Most commonly, business changes their accounting policies to improve reliability and increase logical connection. There are also other reasons such as switching to a different accounting professional.

Related Article: College of Financial Planning

Regardless of the reason for the policy change, the comparability must be ensured. If the changes result in not being able to compare the financial statements after the new policy takes place, it will create room for financial mishaps. Having said that, the comparability in accounting must be guarded at all costs.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button