Accounting Principles Vs Accounting Concepts Vs Accounting Rules

These three are definitely different but connected and their connection is critical in accounting. Under International Financial Reporting Standards (IFRSs) IASB Framework sets out accounting concepts in terms of:

  • Objectives of financial statements: it is simple financial statements should be prepared in a manner that users can use the underlying financial information relating to entity in their economic decisions especially investment decisions. However, it must be noted that objective of financial statements is not just recording and reporting past events rather the resulting performance and position of the entity. Also financial statements prepared under IASB Framework and IFRSs caters only general needs of users.
  • Qualitative characteristics of financial statements are what makes financial statements relevant and reliable. IASB framework chalks out qualitative characteristics a set of financial statements must have which are as follows:
    • Relevance is one of the two qualities framework requires financial statements must possess. Only relevant financial statements can help users. Relevance is the capability of the information to be useful. An information is said to be useful if information can be used:
      • either to predict another information
      • or to confirm another information

Another factor that affects information to be relevant is materiality. If an information is materially misstated or omitted than information is rendered irrelevant.

    • Faithful representation require outcomes of business operations must be reported faithfully. Information is said to be faithfully served if it is:
      • complete
      • without any bias i.e. neutral
      • accurate or error free

Based on the concepts that sets out the basis of accounting for elements of financial statements IASB Framework defines accounting principles for recognition and measurement of such elements of financial statements. Although many would believe that there are five elements of financial information (statement) but in reality there are only two. Whole of the accounting revolves around two things:

  • What entity has towards itself i.e. assets
  • What entity has towards others i.e. liabilities

The other three elements are resultant of these two:

  • Equity is a residual of assets above liabilities
  • Income is an increase in assets or decrease in liability
  • Expense is decrease in assets or increase in liability

With these elements defined, framework provides accounting principles:

Recognition principles for assets, liabilities, income and expenses. Recognition is a process of embedding a transaction in financial statements if it meets the definition of one of the elements of financial statements.

Measurement principle provides basis of establishing money values of transactions to be recognised in the financial statements. The measurement principles or basis as mentioned by IASB Framework are as follows:

  • Historical cost principle
  • Current cost principle
  • Realisable value principle
  • Present value principle

Presentation and Disclosure principles provides guidance on how such items pertaining to each element must be presented and disclosed in the financial statements. It is an important task as wrong presentation can seriously hamper understandability or even altogether misstatement. For example repair expenditures of sales staff will be presented as part of selling cost in the income statement.

Accounting rules on the other hands are simply accounting standards. Accounting standards are based on the guidelines set by framework in other words on the basis of accounting concepts and accounting principles. That is the reason why we sometime name accounting standards or IFRSs as rule based framework whereas IASB framework provides conceptual framework.

So its like a hierarchy or a pyramid that on top we have accounting concepts and then in the second accounting principles and lastly accounting rules. One after the other where successor is developed under the light of the predecessor.

Courtesy IFRS

Another thing to remember is that accounting rules include not just standards but also their interpretations, application recommendations and practice statements that are sometimes served separately with relevant standards.