Principle-Based Accounting Vs Rules-Based Accounting

Principle-Based Accounting

Principle-Based Accounting is the accounting system that gives freedom to the company to prepare the financial statement. It does not provide a strict guideline to the company to follow but a basic understanding which can apply to different companies. The accounting principle can be adjusted to fit with the real situation in each company.

International Financial Reporting Standard (IFRS) is the principle accounting standard. It states that a company’s financial statement must be understandable, comparable, readable, and relevant to the latest financial transactions.

All of its standards just provide basic principle and understanding which is not exactly rule that need to follow 100%. The company needs to use its professional judgment to translate and adapt them to the current financial operation. If the company fails to comply with any standard, they need to provide a proper and reasonable explanation.

They are the broad guideline which can be applied to any company and industry. In every circumstance, the company can use the standard to translate apply to their current operation.

Rules-Based Accounting

Rules-Based Accounting is the accounting system that forces the company to follow all the rules when preparing financial statements. It is also known as the tick-box approach. The company needs to adjust their accounting transactions to ensure that they have complied with the standard. All of the rules are very strict and specific, and the company must follow exactly 100% when preparing financial statements.

General Accepted Accounting Priciples (GAAP) is the rule-based accounting system which broadly uses in US. It provides a clear and specific rule for the company to follow. Missing any rule under GAAP will consider as noncompliance.

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 exactly follow 100% of the accounting system and apply them to company financial statements.
Accountants can decide to adjust or ignore any standard which is not reflected in their company. Accountants cannot change any rule, they have to follow everything.
It is a bit challenging to compare the report from one company to another as they are different due to translation. As every company follows the same thing, it allows the user the ability to compare them very easily.
Accountants and auditors will take full responsibility for the financial statement if they impact the public interest. Accountants and auditors can avoid responsibility as they only follow the standard which cannot be revised.