Principle-Based Versus Rules-Based

At the end of the year, every public company in the United States is required to provide financial statements to the public. The main purpose of financial statements is to provide relevant and reliable information to investors so they can make informed decisions (Shortridge & Myring, 2009). Financial statements are created using principle-based accounting standards or rules-based accounting standards (Adkins, n.d.). Rules-based accounting is better than principle-based accounting because it makes financial statements comparable and consistent.

The difference between rules-based accounting and principle-based accounting is that under a rules-based accounting system, accountants have to follow detailed rules, whereas a principle-based accounting system provides general guidelines (Shortridge & Myring, 2009). A benefit of a rules-based system is that financial statements are comparable between companies (Adkins, n.d.). Under a principle-based system, investors would not be able to reliably compare financial statements between companies because each company can use different methods to prepare their financial statements.

Under a rules-based accounting system investors can trust the financial statements because they are consistent (Adkins, n.d.). Rules-based accounting systems do not leave much room for interpretation, which makes the information more consistent and reliable.

A rules-based accounting system is a good way to create financial statements that help investors make informed decisions. Rules-based accounting is better than principle-based accounting, because it makes financial statements that are comparable and consistent.

References

Adkins, W. D. (n.d.). The difference between principles &rules based accounting standards. Retrieved from http://smallbusiness.chron.com/difference-between-principles-rules-based-accounting-standards-81972.html             

Shortridge, R. T., & Myring, M. (2009). Defining principles-based accounting standards. Retrieved from http://www.nysscpa.org/cpajournal/2004/804/essentials/p34.htm