ACCOUNTING PERSPECTIVE - Principle vs Rule

Accounting Principle and Accounting Rules – A Comparison

Accounting is recording and making sense of monetary transactions. Humans might record and represent an information or a transaction in different ways and this would cause chaos in the world. To avoid such disturbance the overlords created some principles to accounting, these principles like the ten commandments do not change.

These basic principles of accounting not only bring a balance in life but are also the foundation for complex and detailed accounting principles issued by different bodies to decide the Debit and Credits of a transaction. Businesses operating as companies or in any other legal form, comply to these principles and rules when preparing their periodic financial statements to present their performances.

One of the most important principle is matching principle that requires the expenses incurred should be recorded in the same period in which the related revenues are earned, this principle gives rise to International Financial Reprting Standard 9 – Financial Instruments, which provides guidelines in creating provisions for receivables.

The Going concern principle assumes that financial statements be prepared assuming that company will continue it’s operations and for atleast next fiscal year. This principal is the basis for International Accounting Standards 1 – Disclosures about going concern.

The accounting principles may not be legally enforceables but when adopted by regulatory bodies like IFAC, then their application is bona fide. Moving forward with discussion of principles, we come across Accrual principle of accounting. Accrual principle requires business transactions to be recorded when incurred and not at time of actual cash flows. We can see the use of this principle Accounting is recording and making sense of monetary transactions.

Humans might record and represent an information or a transaction in different ways and this would cause a chaos in the world. To avoid such disturbance the overlords created some principles to accounting, these principles like the ten commandments do not change.

In many IFRS or GAAP rules, that’s why it is asserted by management that financial statements are prepared on accrual basis.

The economic entity principle is an accounting principle in which it is taught that entity’s finances should be kept separate from those of the owner, partners and shareholders. This gives rise to the legal obligation to register the company or business as a separate legal entity. To understand it in more clear way we must refer to the saying that “It can and it can be sued”. Economic entity principle is considered as one of the vital and core principles of accounting.

Another principle engraved on the stones by the mighty over lords of accounting is Full Disclosure Principle. It states that all relevant and complete information should be made part of the financial statements published. This principle makes auditors of the financial statement perform their procedures to ensure completeness of information and disclosures asserted in the financial statements of the company.

Next on the list is the objectivity principle. This principle is that financial statements of an organization should be based on credible evidence. These evidence should be kept safe and be made available for inspection to auditors or judiciary, by companies for a defined period of time by applicable financial reporting framework and other local regulations.

Accounting experts and teachers have been arguing and discussing various methods and aspects of the current and ever-changing business dynamics to reach new rules which best represents the complex information and transactions to users of the financial statements.

An accountant who was considered to be an old and ugly person spending 10 hours per day on a desk writing stuff on his thick register is being replaced by a computer program, but the basic accounting principles upon which a journal entry is passed remains same. The father of modern accounting Luca Pacioli invented the double entry system and for centuries his principles stand true and useful.

These were some general discussion but, when there are strict regulations enforced by the regulators, like those in the U.S. GAAP system, the possibility of Accounting experts and teachers have been arguing and discussing various methods and aspects of the current and ever-changing business dynamics to reach new rules which best represents the complex information and transactions to users of the financial statements.

Non compliances, penalties and lawsuits is mitigated. Having a pre defined rules can increase accuracy, comparability and clearity in the financials of an organization and decrease the ambivalence that can trigger aggressive reporting decisions by those charged with management.

Some experts suggest that companies should only base their financial system on principles of accountings but critics of principles-based accounting systems argue that this will make companies unleashed and this will lead to no prescribe transparency in the published accounts. It can be claimed that companies if have no specific rules to follo, their reports may present an inaccurate and missleading picture of its performance.

I accept that the above discussion include a material amount of speculation and do not provide a cogent answer, but I believe the coversation builds a basis that presents the significance of standard and rule setting for the accounting industry. As the God did not stop after providing 10 commandments how can accounting as a subject can just be stopped at few principles.

From bookkeeping to business leaders and Chief Financial Officers, accountants thrive on every platform.

They hold in one hand their Principles and Rules on the other hand, while they wear the hat of integrity and shoes of dedication.