Introduction to “Proving Reliability — Accounting Standards” Series

By Moyosore Kuti

In the previous article, I introduced basic concepts in accounting and described how the accounting process starts with a transaction up until such transaction is reported in financial statements and records. But what rules or principles determine how transactions are treated and classified? How can one rely on the transactions reported that they are similar and can be compared uniformly with other businesses, and that same can be used to make important financial decisions?

A common set of procedures for recording transactions, referred to as “accounting standards”, were developed to provide guidance on how the financial information should be treated and reported. These accounting standards are either principles-based or rules-based, meaning that:

• Principles-based standards provide guidelines which allow for accounting principles to be adjusted to a business’s transactions i.e. the nature of a transaction determines what principle-based standard would be used in reporting it; while
• Rules-based standards provide specific and detailed procedures which must be followed in preparing financial statements.

The “Proving Reliability” series will take us on a deep dive into principles-based standards and rules-based standards, and help understand how to apply them in financial reporting.