University Accounting ACC5000 Assignment 2: Principles vs Rules

This report, submitted as ACC5000 Assignment 2, addresses key accounting concepts and practices. Part A includes the Aged Accounts Receivable and Payable, along with the Profit and Loss Statement and Balance Sheet for June 30, 2019. Part B focuses on a comparative analysis of principle-bas...Read More

Running head: ACCOUNTING
Accounting
Name of the Student:
Name of the University:
Author’s Note

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Table of Contents
Part A...............................................................................................................................................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
Principle Vs Ruled Based Accounting Practices.........................................................................5
Analysis of the Two systems.......................................................................................................8
References:....................................................................................................................................10

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Part A
a. Aged Accounts Receivable
b. Aged Accounts Payable

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c. Profit and Loss Statement (30 June 2019)

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d. Balance Sheet (30 June 2019)

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Part B
Principle Vs Ruled Based Accounting Practices
Principle Based Approach
In accounting system, the approaches which are followed for the purpose of reporting
important matters relating to financial performance of the business. The principle-based
accounting practices is the most popular approach towards formulation of accounting records for
a business. The method relies on adjustment of accounting principles for the purpose of meeting
the operations of the business so that the same can be reported in an effective manner. This is am
approach which can be implemented by nu=y business considering the nature of the operations
of the business. The international financial reporting standards follow a principle-based
accounting approach for the purpose of ensuring that the accounting information for a business is
properly reported (Schroeder, Clark and Cathey 2019). The advantages of principle-based
accounting practices for a business are listed below in details:
 The principle-based accounting approach is more flexible and is best suited for the
accountants as they can make rapid adjustments to the reporting framework as per the
requirement of the business. This provides the accountants to make adjustments and
thereby further enhance their skills of accounting. This is the reason that some of the
transactions which requires application of skills and knowledge can be solved in an easier
fashion under this approach.
 The principle-based accounting practices approach allows the accountants to consider
their own judgements and look deeper into matters. The focus is more on substance of the
transaction which promotes sound judgement in the business and also provides a sense of
responsibilities to the accountants. The accountants in this situation are required to

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improvise and make necessary changes in the reporting framework for showing the
financial performance of the business.
The disadvantage which can be identified for principle-based accounting practices in a
business are listed below in details:
 The major factor which affects the viability of the approach is the consistent of the
reporting framework (Henderson et al. 2015). If an accountant uses such an approach in
one year while in the next year some accounting principle changes than the consistency
of the reporting framework would be affected in a serious manner. In addition to this, the
business would also not be able to make comparisons for the decision-making process of
the business.
 In accounting framework, there are certain regulations which are already established and
the same helps the accountants to prepare the financial statement of the business.
However, if a business follows principle-based accounting approach than the business
would be having a hard time for maintaining compliance requirements of account. In
addition to this, compliance with accounting policies is time consuming, expensive and a
bit complex. In addition to this, accounting policies are not enforceable in the court and
therefore dealing with any violation would be difficult for the business.
Rule Based Approach
As per this approach, the accountants are required to follow certain sets of rules which
are already established for the purpose of reporting and formulation of the financial statement of
the company (Schaltegger and Burritt 2017). The conceptual framework which is universally
followed is based on the rule-based system of accounting. The Generally Accepted Accounting

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Principle is based on the rule-based system of accounting. The system is followed by many is
because the system provides a guideline which all accounting professionals needs to follow for
preparing the financial statement of a business. The advantages of the rule-based accounting
system are listed below in details:
 The rule-based accounting system clearly sets out the guidelines or code which is to be
followed by accounting professionals and also shows in which circumstance which
treatment would be applied. In addition to this, the mistakes or errors in relation to
judgements are significantly minimized in case of rule-based accounting system.
 The rule-based accounting system follows the precise requirements of the reporting
framework and effectively focuses on reporting valid and relevant information to the
users of the financial statement. It is for this reason that manipulation in this system
becomes hard for the executives and thereby provide accurate presentation of the
financial performance of the business. In addition to this, the rule-based accounting
system follows strict rules which significantly diminishes possibility of a lawsuit
considering the aggressive reporting framework which is brought about by the system.
The rule-based accounting system keeps the employees and clerks of the business in
check and therefore, the lawsuits are reduced significantly as the overall control over the
reporting framework of the business is excellent (Harrison et al. 2014).
The disadvantage of the rule-based accounting system which can be identified are discussed
below in details:
 The method of rule-based accounting system is not followed in a consistent manner
considering the principle-based accounting approach which is followed in more than 100
countries. Therefore, it is clear that inter country transaction would have an impact of the

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reporting framework. Some of the examples of such transaction are merger, acquisition
which would be difficult to report.
 One of the major issues which can be identified for the rule-based accounting system is
the presence of strict rules which are highly complex in some cases and therefore the
same would be difficult to understand by the accountants. In addition to this, the process
is also very time consuming and resource as well. In an overall estimate, it can be said
that the rules are also rigid somewhat affecting the flexibility in making certain decisions
relating to the reporting framework which is followed in a business. The same also
promotes comparability in the financial statements which is prepared by the business
(Gassen 2014).
Analysis of the Two systems
There are lot of arguments regarding which approach is better for reporting the financial
information of a business. The IFRS follows the principle-based approach for reporting valid
information relating to a business while the rule-based approach is followed by the US GAP.
Both the approaches aim to ensure that the users of the financial statements have a glimpse of the
entire picture relating to the business before decisions can be taken. However, it can be said that
the principle-based approach which is followed by IFRS has an upper hand as US GAAP is
implemented in one country while IFRS framework is followed in 110 countries. Even in the US,
the IFRS framework was made optional for the companies to follow for better disclosures of the
financial information of the business. The companies however, needs to disclose the basis o
preparation of the financial statements as this would make it clear which approach is followed by
the business (Mullinova 2016).

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On the basis of the discussion which is shown above, it can be clearly stated that
principle-based approach towards accounting is the better approach as the same promotes
consistency in the reporting framework which is followed. Further, the advantages also show that
the system allows accountants to hone their skills further and thereby develop an accuracy so that
mistakes does not take place. The system is also known to be reliable for the purpose of reporting
of financial information. Therefore, it can be said that the principle-based approach for
accounting is the most accurate and the same should be followed by accounting professionals for
the purpose of reporting.

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References:
Gassen, J., 2014. Causal inference in empirical archival financial accounting
research. Accounting, Organizations and Society, 39(7), pp.535-544.
Harrison Jr, W.T., Horngren, C.T. and Thomas, C.W., 2014. Financial accounting. Pearson
Education.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting.
Pearson Higher Education AU.
Mullinova, S., 2016. Use of the principles of IFRS (IAS) 39" Financial instruments: recognition
and assessment" for bank financial accounting. Modern European Researches, (1), pp.60-64.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.