Corporate Accounting. Public Accounting: Financial Audit and Taxation. Accounting Systems and Record Keeping. Accounting for Inventory. Key Takeaways Nearly all companies are required to prepare their financial statements as set out by FASB, whose standards are generally principles-based.
Critics of principles-based accounting systems say they give companies too much freedom in reporting. On the other hand, critics of rules-based methods like GAAP cite that the system can often be too complex.
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When applying a principle based accounting system, the accountant not only follows a loosely regulated set of principles but is also expected to apply his or her own judgment while making decisions about the implementation of accounting essentials.
A rule based accounting system establishes set line of rules that need to be obeyed in every situation which restrict the accountants to apply their own professional skepticism. This can lead to accountants not assuming their professional duty of working in the best interest of general public and the company and can easily blame the rules if a law suit is proceeded against them. A principle based accounting system offers more flexibility to the companies because it allows for the principles to be adjusted according to individual needs of each company if followed by reasonable justifications.
However, rules based accounting system does not provide this privilege and companies following this set of accounting system must have to adhere to all the set rules in all circumstances.
Standardization is important because it makes it easier to compare financial results amongst different companies. Therefore , the financial results of all the companies are prepared by same regulations which offers more standardization and comparability. Both the accounting systems provide detailed guidelines about the preparation and publication of financial statements of companies.
It provides a clear and specific rule for the company to follow. Missing any rule under GAAP will consider as noncompliance. Rules-Based Accounting Rules-Based Accounting is the accounting system that forces the company to follow all the rules when preparing financial statements. Difference Between Principle-Based and Rules-Based Accounting Principle-Based Accounting Rules-Based Accounting Accountants use their own professional judgment to analyze the standard and current transactions to prepare financial statements.
Accountants can decide to adjust or ignore any standard which is not reflected in their company. Companies use accounting to detail their financial information in readable reports. GAAP is a set of conceptual principles rather than a rules-based accounting framework.
Major differences exist between a principles-based and rules-based system, with diverging opinions on both sides. A principles-based accounting system — such as GAAP — provides basic guidelines for accountants to follow. In some cases, the principles provide suggestions on how to apply GAAP to complex financial transactions. This leads to different reporting for certain transactions, making it possible for two companies to handle a similar transaction differently.
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