Question

what is rules and principle based approach in accounting theory. What is the difference between rules and principle based approach. give examples

Answer 1

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.