Principle-based Standards versus Rule-based Standards Essay

Principle-based Standards versus Rule-based Standards - Essay Example Every organization prepares its financial statements following a certain set of accounting principles, these standards are generally principle (McGregor & Street 2007). Accounting policy makers are now emphasizing on the effectiveness of principle based accounting and rule based accounting. The argument of these debates has different perceptions (Bennett, Bradbury & Prangnell 2006). However, accounting is a precise subject based on mathematics and does not have any place for judgments. This paper discusses the statement with respect to arguments on these accounting principles referring conceptual framework. Rule based Accounting emphasizes on the detailed rules that shall be followed by accounting while preparing financial statements (Benston, Bromwich & Wagenhofer 2006). It states that the absence of rules may not provide accurate reporting of financial results. When strict rules are followed the accuracy increases and the possibility of ambiguity decreases. On the other hand, princ iple based accounting as known as Generally Accepted Accounting Principles is more focused on the conceptual basis for accountants (Bennett, Bradbury & Prangnell 2006). It is more concerned to ensure good reporting through a set of guidance. Principle-based accounting provides a broad range of guidelines that may be practiced for a variety of circumstances (Collins, Pasewark & Riley 2012). Accountants debate that the application of rule-based and principle-based accounting is as complicated as issues of economics; the dynamic economical conditions are triggering point for accounting circumstances to transform (Benston, Bromwich & Wagenhofer 2006). Therefore, the effectiveness of the application of these rules and principle may remain controversial. Considering the conceptual framework both accounting standards are based on simple mathematics. Treatment of Elements The treatment of the accounting elements is evidenced that the accounting principles are based on simple mathematics (Jo nes 2011). The treatment of assets, equities, liabilities, revenue and expenditures in both rule based and principle based accounting standards is alike. According to the conceptual framework, the objectives and elements of accounting principles are similar (Bennett, Bradbury & Prangnell 2006). Principle-based accounting and Rule-Based accounting have largely same objectives. The qualitative characteristics of both standards are also similar; according to the recent research it has been concluded that GAAP and IFRS follow basic agreements on the qualitative characteristic, that is, Relevance, Understandability, Reliability and Comparability (Collins, Pasewark & Riley 2012). Qualitative Agreement The concept of understandability is also similar in both standards. Principle based accounting and rule based accounting standards emphases that the financial information shall be understandable for users of financial statements (Ampofo & Sellani 2010). Another qualitative agreement, that is relevance, both the standards provide basic agreements on that the financial information should be relevant. If we focus on the treatment of elements in Principle-based accounting and rules based accounting is similar (Agoglia, Timothy & Tsakumis 2011). Consider the treatment of revenue in the both principles is similar (Whittington 2008). The foundation of accounting is based on a formula that is assets are equal to a sum of liabilities and equities (McGregor & Street 2007). No major differences in the treatment of as