In: Accounting
what is rules and principle based approach in accounting theory. What is the difference between rules and principle based approach. give examples
Answer-Principle based accounting:-
A principles-based accounting system — such as GAAP — provides basic guidelines for accountants to follow. The basic ones found in GAAP include regularity, consistency, sincerity, prudence, continuity, periodicity and good faith, among others that may apply to a company’s operations.
Rules based accounting:-
Rules-based accounting systems provide specific dictates for reporting financial information. Accountants must follow these rules or face penalties for noncompliance. International countries may have a rules-based system. Rules detail how a company should prepare and report financial transactions
Difference between rules and principle based approach
Decision-making | |
Set principles and accountant’s own judgment is applied. | Only rules are followed. |
Legal Aspects | |
Accountants are assumed to apply their best judgment, therefore they can be held accountable under legal situations. | Accountants can avoid legal charges or responsibility by ascertaining the fact of following rules and regulations. |
Flexibility | |
Provides flexibility to companies in certain situations if can be duly explained. | Rules have to be followed as they are without any other choice. |
Application | |
Applied in almost 120 countries except USA. | Applied in USA. |
Standardization | |
Can restrict standardization and comparability because it provides a set of thresholds instead of strict border lines. | Promotes standardization because same rules are followed by every company under every condition. |