Accounting Theory and Application: Principles vs. Rules

This essay delves into the core of accounting theory, specifically comparing and contrasting principle-based and rule-based approaches to financial reporting. It begins with an introduction to both methods, emphasizing the Financial Accounting Standards Board's role and the global adoption of these approaches. The essay then critically examines the advantages and disadvantages of each approach, highlighting how principle-based accounting promotes professional judgment and flexibility while potentially complicating compliance and enforcement. Conversely, it explores how rule-based approaches offer simplicity in comparing financial data but can create unwanted difficulties for companies. The analysis proceeds to evaluate the appropriateness and reliability of each method, concluding that, despite the advantages of principle-based approaches, rule-based methods often offer greater reliability, particularly in the context of legal liabilities and unbiased financial reporting. The essay references several sources, including AICPA, ICAEW, and Investopedia, to support its arguments.

Running head: REPORT 1
ACCOUNTING THEORY AND APPLICATION
STUDENT DETAILS:
9/18/2019

REPORT 2
Contents
Introduction......................................................................................................................................3
Advantages and disadvantages of principle v. rule approaches to accounting................................3
Appropriateness of principle v. rule approaches to accounting.......................................................4
Reliability of principle v. rule approaches to accounting................................................................5
Conclusion.......................................................................................................................................6
References........................................................................................................................................6

REPORT 3
Introduction
Mostly, it is required by all the corporations that they should prepare the financial statements
according to the principles of Financial Accounting Standards Board, whose standards are based
on principles. The reporting of the financial statements is based on the fact that what method the
organizations adopt as well as where they are. The Principle approaches to accounting are
considered as the famous accounting method everywhere in the world. There are various nations
that adopt principles based accounting, as this is good to adjust the accounting principles to the
transactions of organization in place of adjusting the function of company to the accounting
rules. Additionally, rules approaches to accounting are basically the list of detailed rules, which
should be adopted at the time of preparation of the financial statements of company.
The Generally Accepted Accounting Principles system is a system based on the rules. It is
required by the companies as well as accountants that they should follow the rules while they
compile the company’s financial statements. In the following parts, disadvantages and
advantages of principle v. rule approaches to accounting, their appropriateness and reliability is
discussed and critically examined.
Advantages and disadvantages of principle v. rule approaches to accounting
The principles based accounting principles motivate the accountant to adopt the spirit of
accounting concept in place of following the particular accounting rules (The Wall Street,
2019). The accounting principles need the accountant to consider the substance of transactions
deeply. The principles based accounting principles promote the sound specialized judgments in
profession as well as instills more of accountability sense in accountants (ICAEW, 2019). In this

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way, the principles based approaches to accounting provide more flexibility. It is clear that it
motivates professional judgments; however it is complex to comply with as well as implement
(Mondaq, 2016). However, principles based accounting has some disadvantages. The main
drawback is that complying with accounting principles is very critical, time-taking as well as
costly. Additionally, if principles are utilized in place of the rules, accounting data can start to
become lesser reliable. Next, the enforcement of principles based approaches to accounting are
critical. The corporations are constantly accused of misplacing the financial data, however asking
judge as well as panel with no financial experiences for interpreting the accounting principles at
the time of enforcement matters can be the poor idea (AICPA, 2008)
In addition, the rules based approaches to accounting also have some advantages and
disadvantages. The main advantages of this accounting system is that the rules based approaches
to accounting permit the investor to use simple way for comparing the financial data of different
organizations. The rules based approaches to accounting create the legal base for the
corporations to comply with financial statements of company. The rules create the
appropriateness in making financial statements. The main drawback is that rules based
approaches to accounting are very complex for the company to follow and implement. The rules
can create unwanted difficulties for the company and accountants of company in the accounting
(Bizfluent, 2019b).
Appropriateness of principle v. rule approaches to accounting
To contemplate which accounting method is appropriate and better for the company, it is
required to make certain that the data rendered in financial statements of company is relevant,
consistent, as well as comparable across the reporting periods as well as organizations. The

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principles based approaches to accounting are appropriate because with the help of this it can be
easy to make professional judgment. The above mentioned discussion in relation to advantages
and disadvantages of accounting system, has forced the accountant towards principle based
approaches to accounting (Investoperdia, 2019). However, this is identified that this method
requires to be changed to create this more effective as well as well-organized.
Reliability of principle v. rule approaches to accounting
The principles based accounting system can render corporations far so much freedom. The
principles based approaches to accounting do not ensure the transparency for the shareholders of
company. The shareholders of company cannot reliable on this properly and completely. They
believe for the reason that the organization does not have to adopt the particular rules, which
have been set out, their reporting can render the imprecise as well as mistaken picture of the
financial health of company. In my opinion, because of these reasons, the accountants should
prefer the rules based approaches to accounting while compared to the principles based
approaches to accounting system (Chron, 2019). The reason is that the rules based approaches to
accounting are more reliable in comparison of the principles based approaches to accounting.
The main reason for this is ending of legal liabilities from accountant in making financial
information. Despite the fact that the rules based approaches to the accounting can be hard to
implement in the operating surroundings as well as setting of the company, the rules controlling
the financial accounting reports create no bias in making as well as assessing the relevant
documents along with financial statements of company (Bizfluent, 2019a).

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Conclusion
As per the above analysis it can be concluded that moreover, the IFRS system that is most
frequent international accounting standard is not a system based on rules. It is stated by
international financial reporting standards that financial statements of company should be
comprehensible, clear, comparable, along with appropriate to the existing financial transactions.
On the other, there are various accountants who favor the view of following the standards based
on rules because without the rules, they can be taken to court if the judgment related to financial
statements were not correct. The main issues overall is that there are no one set accounting
methods, which have been universally followed.

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References
AICPA (2008) Is IFRS That Different From U.S. GAAP? Available at:
https://www.ifrs.com/overview/General/differences.html [Access on 21/09/2019]
Bizfluent (2019) Advantages & Disadvantages of Principles-Based Accounting. Available at:
https://bizfluent.com/info-8370701-advantages-disadvantages-principlesbased-accounting.html
[Access on 21/09/2019]
Bizfluent (2019) The Difference Between Principles & Rules-Based Accounting Standards.
Available at: https://bizfluent.com/info-8333888-difference-principles-rulesbased-accounting-
standards.html [Access on 21/09/2019]
Chron (2019) Difference Between Principles & Rules Based Accounting Standards. Available at:
https://smallbusiness.chron.com/difference-between-principles-rules-based-accounting-
standards-81972.html. [Access on 20/9/2019]

REPORT 8
ICAEW (2019) Principles versus Rules Debate. Available at:
https://www.icaew.com/technical/ethics/ethics-in-business/general-ethics/principles-versus-
rules-debate [Access on 20/9/2019]
Investopedia (2019) How Are Principles-Based and Rules-Based Accounting Different?
Available at:
https://www.investopedia.com/ask/answers/06/rulesandpriciplesbasedaccounting.asp [Access on
20/9/2019]
Mondaq (2016) The Impact Of New Principles-Based Accounting Standards On Litigation.
Available at :
http://www.mondaq.com/unitedstates/x/471852/Accounting+Standards/The+Impact+Of+New+P
rinciplesBased+Accounting+Standards+On+Litigation [Access on 20/9/2019]
The Wall Street journal (2019) The Accounting Debate: Principles vs. Rules. Available at:
https://www.wsj.com/articles/SB103886213539574553 [Access on 21/09/2019]