ACC5000 Assignment 2: Principles vs Rules Based Accounting Analysis

This report, prepared for ACC5000, delves into accounting theory and its practical applications. Part A involves generating and analyzing financial reports, including Aged Accounts Receivable, Aged Accounts Payable, Profit and Loss Statement, and Balance Sheet, extracted from Xero. Part B centers ...Read More

Running head: ACCOUNTING THEORY AND APPLICATION
Accounting Theory and Application
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ACCOUNTING THEORY AND APPLICATION
Table of Contents
Part A:........................................................................................................................................2
Preparing the Following reports from Xero:..............................................................................2
a. Aged Accounts Receivable:...................................................................................................2
b. Aged Accounts Payable:........................................................................................................2
c. Profit and Loss Statement (30 June 2019):............................................................................3
d. Balance Sheet (30 June 2019):...............................................................................................4
Part B:.........................................................................................................................................5
Evaluating about the Principles vs. Rules based approach to accounting by analyzing their
advantages and disadvantages:...................................................................................................5
Discussing and critically analyzing whether Principles vs. Rules based approach:..................7
Determining which of the method is most reliable to the accounting measure:........................8
References:...............................................................................................................................10

ACCOUNTING THEORY AND APPLICATION
Part A:
Preparing the Following reports from Xero:
a. Aged Accounts Receivable:
b. Aged Accounts Payable:

ACCOUNTING THEORY AND APPLICATION
c. Profit and Loss Statement (30 June 2019):

ACCOUNTING THEORY AND APPLICATION
d. Balance Sheet (30 June 2019):

ACCOUNTING THEORY AND APPLICATION
Part B:
Evaluating about the Principles vs. Rules based approach to accounting by analyzing
their advantages and disadvantages:
There are mainly two different types of accounting standards, which can be used by
organizations to effectively formulate their financial reports. The measures that are
maintained by the companies are ruled based accounting standards or the principle based
accounting standards. Both the accounting standards have advantages and disadvantages,
which helps in improving the reporting structure of the organization.
Significance of rule-based approach to accounting is depicted as follows.
 The rule based accounting standards increases the accuracy with which standard setters
communicate with the requirements and increased comparative ability conditions for the
organization (Oulasvirta 2014).
 The method also helps in increasing the verifiability of auditors and regulators while
adequately reducing the litigations that might be conducted while drafting the financial
report. The rule-based accounting directly allows the auditors and accountants to provide
adequate information in the annual report.
 The rule-based accounting standard helps in reducing the opportunities for earnings
management that is conducted by the judgements of the directors who can reduce and sort
the impression that lead to aggressive reporting choices.
The disadvantages of rule-based approach to accounting are depicted as follows.
 One of the problematic conditions that haunt the rule-based accounting standard is that
the accountants can violate the rules, as they are uncertain of everything that they need to
look at for identifying the transactions and following the overall method. Rule based

ACCOUNTING THEORY AND APPLICATION
accounting standard uses directly utilize the legalistic approach for identifying the
transactions and financial report of the organization.
 Rule-based accounting standard does not provide adequate measures and steps that need
to be conducted by the accountants, which is presented in the principle based accounting
standard. This increases the chance of relevant formulation of adequate annual reports
(Jefrey 2018).
The advantages of principle-based approach to accounting are depicted as follows.
 The principle based accounting standard is its broad guideline, which is applied to
numerous situations that is encountered by the organizations. The broad principle that is
provided by the approach helps the organization to avoid the pitfalls that are associated
with the precise requirements and effectively help in reducing the manipulative nature of
accountants. The process also helps in improving the representational faithfulness of the
financial statement that is conducted by the organization.
 Advantage to the principal basis accounting standard is there professional judgement that
assesses the accountants while conducting relevant transactions in the financial report.
 The method also helps providing result in simple standard, which would be easier to
comprehend and apply for, or major transactions conducted within the organization. This
method would you effectively help in accommodating the unanticipated transactions that
are less transparent to outsiders (Kieso, Weygandt and Warfield 2019).
 The principle-based standard also helps in effectively providing the accounting statement
that is precisely reflecting actual performance of the organization, as the standard reduces
the level of manipulations within the organization.
 The principle-based standard is also used in export for raising the comparative ability and
consistency of comparing the financial reports of other organization, detects problems,
and details guidelines to efficiently support its operations in future.

ACCOUNTING THEORY AND APPLICATION
The disadvantages of principle-based approach to accounting are depicted as follows.
 The principle-based approach has certain disadvantages of, which is faced by the
accounts while completing the annual report. The lack of exercise guidelines within the
principle based accounting standard could create inconsistency. This would hinder the
application of the standard across organization, where the lack of adequate standards
reduces consistency incompatibility conditions of the organization, which is the primary
precept of financial accounting. Nevertheless, in the current era of accountants prefer
rule-based standards that have the possibility to support the concerns of the organization
and provide potential litigation over the exercise of judgement in the absence of the bright
line rules. The accountants prefer rule based standard for adequately comprising all the
relevant information of the financial transactions in the report (Nord 2014).
 The principle-based accounting is that it implies that all the information should be
relevant, reliable and comparable across all the reporting period and entities. Therefore, if
the requirements go to provide adequate information regarding the relevant and reliability
conditions of the entities then your organization would adopt reporting methods that
would effectively reflect the economic realities of their current conditions. However, this
would relatively reduce the possibility of any comparison between the companies and
across the reporting periods that investors used to identify irrelevant financial
performance of an organization.
Discussing and critically analyzing whether Principles vs. Rules based approach:
Analysis of both accounting system help in identifying the relevant popularity of
Principles and Rules based approach across different regions in the globe. Principle based
accounting system is the most popular accounting method, which can be found in many
places around the globe in comparison to rule based accounting system. System is mainly

ACCOUNTING THEORY AND APPLICATION
backed by the International Financial Reporting Standards System (IFRS), which is a
common interpretation of the international accounting standards that needs to be used by
organizations while presenting the annual report in a global scale. However, the rule based
accounting system is usually backed by the Generally Accepted Accounting Principles
(GAAP) system that is mainly associated with the United States. The evaluation of the
overall standard has indicated that principle based accounting system directly follows the
IFRS method where the company's financial statements needs to be readable, understandable,
compatible, and have adequate backup of financial transactions (Schaltegger and Burritt
2017).
The rules-based GAAP accounting system mainly comprises of principles that needs
to be followed by companies, which are Regularity, No expectation of compensation,
Consistency, Prudence with no semblance of speculation, and Continuity. The analysis has
mainly shown that there are problems with both the systems as there is no one set of
accounting method that can be universally adopted by the organizations. More than 110
countries utilize the IFRS method while GAAP is only used within the United States. The
problems associated with the principle based accounting system is that it provides companies
far too much freedom and has no relevant prescription for transparency, which allows the
management to not follow specific rules while providing the report on their financial health.
In the similar process, there are problems with GAAP, as it is a complex rule type accounting
method, which allows the accountants to manipulate the financial records and enhance their
financial records for luring in more shareholders (Maskell, Baggaley and Grasso 2017).
Determining which of the method is most reliable to the accounting measure:
Therefore, it is not possible for identifying the best possible accounting method that
can be used by the organization. However, it is certain that the data used in the annual report

ACCOUNTING THEORY AND APPLICATION
needs to be comparable, reliable, and relevant across the reporting periods and entities.
Nevertheless, there is an intense discussion from the accountants towards the principle based
accounting method, as it helps in recognizing the adequate modifications that is needed to
improve the effectiveness and efficiency of the accounting report. Thus, it could be
understood that the principle based accounting method is more appropriate than the rule
based accounting method (Hayes 2017).

ACCOUNTING THEORY AND APPLICATION
References:
Hayes, A.F., 2017. Introduction to mediation, moderation, and conditional process analysis:
A regression-based approach. Guilford Publications.
Jefrey, C. ed., 2018. Research on professional responsibility and ethics in accounting.
Emerald Publishing Limited.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2019. Intermediate accounting. John Wiley
& Sons.
Maskell, B.H., Baggaley, B. and Grasso, L., 2017. Practical lean accounting: a proven
system for measuring and managing the lean enterprise. Productivity Press.
Nord, C., 2014. Translating as a purposeful activity: Functionalist approaches explained.
Routledge.
Oulasvirta, L., 2014. The reluctance of a developed country to choose International Public
Sector Accounting Standards of the IFAC. A critical case study. Critical Perspectives on
Accounting, 25(3), pp.272-285.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues,
concepts and practice. Routledge.