Ethical Obligations and Decision-Making in Accounting 2nd Edition by Steven Mintz, Roselyn Morris

Exercise 5

Explain the difference between a rules-based and principles-based approach to accounting standard setting. Which model do you think helps to better present financial position, results of operations, and changes in cash flows? Why?

Step 1 of 2

Accounting:

In simple words, accounting is the process of recording, classifying, and analyzing the financial information of a company. This is not a single process as it includes many sub-processes under it. It requires specific knowledge.

According to the AICPA Code of Professional Conduct, an accountant should use his professional knowledge and should be responsible for moral judgment in all his activities done in the course of action.

An accounting plan is a systematic method by applying rules, specific accounting treatment to record books of account.

Accounting rules:

Accounting rules are defined as a statement which provides guidelines to record the accounting transaction.

Accounting standard:

This is a set of basic rules and principles set by the Financial Accounting and Standard Board (FASB). These rules help the manager in managing accounts properly. It increases the transparency of accounts. It helps in fair representation of accounts.

GAAP:

GAAP stands for generally accepted accounting principles. It is the set of accounting principles and standards.

It was issued in 1973 for US public and private companies by the financial accounting standard board for issuing a public statement.

It is the set of accounting guidelines lines and rules used by the companies for financial reporting.

IFRS:

IFRS stands for international financial reporting standards. It is developed by the IASB (International accounting system board) for the preparation of the balance sheet and other profitability statements.