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Principle vs Rule Based

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Activity-based costing (ABC) is a costing method that assigns value to each activity resource to all products and services according to the cost of its usage. it gives indirect costs (overhead) into direct costs so that an organization can correctly estimate the cost of its individual products and services to identify and eliminate the unprofitable and lower the prices of the overpriced. Normally, it is used as a tool for understanding product and customer cost and profitability.

But ABC has also been used to support strategic decisions like pricing, outsourcing, identification and measurement of process improvement initiatives.

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ABC can be used for external reports, but mostly it is used for internal purposes. External reports don’t not need to be as detailed. Some cost are reported, however breakdowns may not be included. Grenzplankostenrechnung (GPK), roughly translating to “flexible standard costing,” is the costing systems used heavily in Germany and other European countries.

Companies that use GPK work towards identifying cost behaviors, traceability, relevance to decision making, and cost period measurement.

The main idea behind GPK is the responsibility center. GPK helps keep cost centers in control in areas such as cost planning and cost control and measures efficiency. But GPK does not give management information needed concerning indirect cost centers and it is always changing and being revised demanding more personnel. Lean accounting is designed for companies who have implemented lean manufacturing techniques.

Traditional cost accounting cannot always accurately reflect the positive and cost saving measures that a lean system provides. Since many of a company’s choices are made from crunching numbers that the accounting department provides, benefits are overlooked using traditional accounting methods. The principles of lean accounting are to measure and motivate. Resource consumption accounting (RCA) is a comprehensive cost management system providing managers with decision support information for enterprise optimization.

RCA is fairly new, blending GPK and ABC together creating an integrated approach to management accounting. Standard costing is usually associated with a manufacturing company’s costs of direct material, direct labor, and manufacturing overhead. Standard costing was developed to assist a manufacturer plan and control its operations. Instead of assigning the actual costs to a product, many manufacturers assign the expected or “standard” cost. GAAP require that a manufacturer’s financial statements meet the terms of the cost principle.

Standard costing will meet the GAAP requirements, but only if the differences between the standard costs and the actual costs are properly prorated. Throughput accounting (TA) is a somewhat new approach focused for the most part on the identification of factors that limit a business from reaching its goal. It is neither cost accounting nor costing because of its focus on cash and it does not allocate all costs to products and services sold. In TA emerges the use of Theory of Constraints (TOC) used for increasing profits.

However TA primarily focuses on producing more throughput. Throughput accounting is the only management accounting method that considers constraints as factors that limit the performance of the business. ****************************************************************************** U. S. GAAP (generally accepted accounting principles) are accounting rules used by accountants of many different entities, including publicly-traded and privately-held companies, non-profit organizations, and government to prepare, present, and report financial statements.

The United States government does not directly set accounting standards, believing that the private sector has better knowledge and resources. During the Great Depression, after many companies and businesses went bankrupt, our government took a closer look and it was discovered that these failing companies were not healthy, profitable companies at all and were using bookkeeping tricks to make it appear that their businesses were doing well. Their financial statements were all lies. Many of the accountants involved in these fraudulent activities, testified to the courts, that these procedures were “generally accepted accounting principles”.

Because of this history, today we have had a dramatic change to help accountants better operate in finance using GAAP and regulate accounting activity. Though US GAAP is not written in law, U. S. Securities and Exchange Commission (SEC) has required that it be followed in financial reporting by publicly-traded companies. U. S GAAP ensures that financial reporting provides information useful and presentable to potential investors and creditors and others for making rational investment, credit, and other any financial decisions. Reports should be helpful to potential investors and creditors and others for ssessing the amounts, timing, and uncertainty of prospective cash receipts as well. These are the two basic objectives of U. S. GAAP. To achieve the objectives, U. S. GAAP has a variety of assumptions, principles, and restrictions totaling eleven basic concepts that accountants are expected to act under. Assumptions The business entity concept assumes that the business is separate from its owners or other businesses. This concept does not allow any personal assets or interest of the owners to end up on the business balance sheet. The continuing concern concept assumes that a business will continue indefinitely.

The values of the assets belonging to the business that is alive are simple. For example, letterhead with the company’s name printed on them would be valued at their cost. However, if the company is going out of business, the letterhead would be more complicated to sell because the company’s name is on them. The time period concept implies that the economic activities of an enterprise can take place over specific time periods known as fiscal periods. These fiscal periods are of equal length, and are used when measuring the financial progress of a business.

Principles The revenue recognition convention provides that revenue is recorded at the time the transaction is completed or when revenue is realized or realizable. In some occasions, this principle may require more action. For example, for a long project, revenue is taken into the accounts on a periodic basis. This is called accrual basis accounting. It is important to take revenue into the accounts properly. If this is not done, the earnings statements of the company will not be accurate and the readers of the financial statement will be informed incorrectly.

The matching principle is an extension of the revenue recognition convention. The matching principle states that each expense Expenses must be matched with revenues if it is related. Expenses can be recognized once the work or the product has made its contribution to revenue. The cost principle states that the accounting for purchases must be reported based on acquisition costs rather than fair market value for most assets and liabilities. The full disclosure principle states that any and all information that affects the full understanding of a company’s financial statements must be included with those financial statements.

However, items such as outstanding lawsuits, tax disputes, and company takeovers would be included in the form of accompanying notes because they do not affect the ledger accounts directly. Restrictions * The principle of conservatism provides that accounting for a business should be fair and reasonable. Accountants must be able to make evaluations and estimates, deliver opinions, and make logical selections between two solutions in a way that neither overstates nor understates the affairs of the business or the results of operation.

The objectivity principle states that accounting will be recorded only on the basis of objective evidence. Meaning that different people should be able to look at the evidence and arrive at the same values for the transaction because the transaction will be based on fact not personal opinion. The initial document for the transaction is almost always the best objective evidence available. The consistency principle means accountants must apply the same methods and procedures to every case. If they choose to change a method from one case to another, they must explain the change clearly on the financial statements.

Also, the readers of these financial statements have the right to assume that consistency has been maintained if there are no statements to show the otherwise. The consistency principle prevents people from changing methods for the sole purpose of manipulating figures on the financial statements. The materiality principle requires accountants to use generally accepted accounting principles except when to do so would be expensive or difficult due to significance, and where it makes no real difference if the rules are ignored.

If a rule is temporarily ignored, the net income of the company must not be significantly affected, nor should the reader’s ability to judge the financial statements be impaired. ************************************************************************************* ————————————————- International Accounting Standards Board (IASB) is an independent privately-funded regulatory body, based in the UK founded on April 1, 2001 as the successor to the International Accounting Standards Committee (IASC). IASB seeks to construct a single set of global accounting standards.

Consisting of board members come from nine countries and a variety of functional backgrounds, the IASB is committed to developing a single set of high-quality, understandable, and enforceable global accounting standards. They are currently striving for convergence in accounting standards around the world. In 2001, with the emergence of the IASB, the IFRS was developed. The SEC has examined the likelihood of a principles-based accounting system concluded from their studies that principles-based accounting would be more effective. Accounting firm leaders have already shown signs of support of the move toward principles-based standards.

The CEO of PricewaterhouseCoopers, and Ed Nusbaum, CEO of Grant Thornton have both publicly anticipated a switch to principles-based standards. The Financial Accounting Standards Committee (FASC) of the American Accounting Association believes that a principles-based approach is more likely to result in transactions that reflect their true economic substance. Finally, FASB Chair Robert Herz has said that the current rules-based system is problematic because “Those who want to comply with rules … are not always sure of everything they need to look at.

Those looking to get around the rule … can use legalistic approaches to try and do it” (Business Week online, 2002). I feel as though a principles-based accounting system such as IFRS would have a more positive effect on our accounting procedures than negative. Its broad guidelines that can be applied to numerous situations may help accountants avoid the difficulty that comes with extreme requirements that allow contracts to be written specifically to manipulate their intent. Broad guidelines may improve the representational truthfulness of financial statements.

Additionally, IFRS encourage accountants to exercise professional judgment when evaluating a transaction. This approach is considerably unlike the current “box-ticking” approach common in U. S GAAP rules-based accounting standards. Robert Herz, FASB Chairman, has expressed that he believes the professionalism of our financial statements would surely be enhanced if accountants were required to utilize their judgment instead of relying on detailed rules. Furthermore, the IFRS system would provide standards that would be less than 12 pages long, much easier to

Cite this Principle vs Rule Based

Principle vs Rule Based. (2018, Jul 31). Retrieved from https://graduateway.com/principle-vs-rule-based/

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