Accounting principles are rule-based understanding that aids in recording financial transactions, reporting financial results and valuing assets and liabilities. The accounting principles support the mission of GAAP. Accounting principles are essential for comparing the financial statements. Entity, consistency, measurement, period, objectivity, full disclosure, materiality, and prudence are examples of accounting principles. Accounting principles are the basic rules for the transactions. Accounting standards are a set of specific rules for accounting transactions. The blog intrigues the readers with a detailed discussion on the difference between accounting standards and principles and 2024 changes in accounting standards.
Difference between accounting principles and standards:
ICAI constituted the accounting standards board in 1977. The board formulated the standards to maintain quality in the accounting, auditing and financial reporting. The accounting standards board frame the new standards and publishes relevant study materials, notes and technical guidance to implement the accounting standards. The International Accounting Standards Board works under the IFRS Foundation. The board is a private-sector body that approves the international standards. ASB implement regional principle-based standards in the accounting process. GAAP helps maintain the credibility of the business. Every year, ICAI issues the accounting standards. The following points explain the difference between accounting principles and standards.
- Accounting principles form the basis guidelines for the systematic record of accounting transactions. Accounting standards form the specific guidelines for comparing the financial reports of different companies.
- Accounting principles are with a nature of judgemental understanding. Accounting standards are with a nature of subjectivity of business.
- Accounting principles are updated occasionally. Accounting standards are updated more frequently.
- Changes in the accounting principles require revision and review. Changes in the accounting standards require the views of subject matter experts.
- Accounting principles are a conceptual part of accounting. Accounting standards are a practical implementation part of accounting.
- Accounting principles bring accuracy. Accounting standards bring value to the business.
- Investors extract information from the financial results of the company. Comparison of the results based on periods helps in understanding the performance and growth of the company. GAAP is the set of rules used in some foreign countries. IFRS is the set of rules for international accounting standards. GAAP is a rule-based system. IFRS is a principles-based system.
- In India, the accounting standards are based on IFRS. The latest revision of the accounting standard happened in 2021. ICAI has issued expert opinions and guidance notes to explain companies about the Indian GAAP. In India, around 18 accounting standards are from GAAP. Wipro, NIIT, Infosys Technologies, Mahindra and Mahindra, Bombay Dyeing, Tata Motors, and Dr Reddy laboratories are the blue-chip companies following IFRS.
- GAAP is used by companies operating in the United States. IFRS is in practice in more than 110 countries around the world. EU, South American countries and Asia are using the concept of IFRS in accounting standards.
Changes in accounting principles and standards in 2024:
- Accounting principles are the rules for recording, summarizing and classifying financial transactions. Accounting principles ensure the financial, economic and legal well-being of the business. The following amendments are expected in the future. The practical implementation of changes in the accounting standards happens after understanding the guidelines from GAAP and IFRS.
- In 2024, the ASC 606 revenue recognition principle is coming into practice. The rule standardises revenue recognition with comparability and consistency. The five steps involved in revenue recognition are as follows: identify the contract, calculate the transaction price, and performance obligation, allocate the transaction price against the performance obligation, and recognise revenue after checking the performance obligation. The last step explains that the revenue is measured against performance obligation and not against the payment.
- In 2024, the companies should disclose the lease accounting. ASC 842 is about recording the current value of the lease liability.
- Accounting and bookkeeping is a low-profile job. Businesses around the world are outsourcing the low profile job and retaining the high profile job. The core management team take care of the analysis and decision-making. Outsourcing activities are undertaken by professional service providers.
- Automation, digitalisation and technology are bringing in many changes in the accountancy profession. ICAI is joining hands with technology experts to understand and implement Artificial intelligence in the auditing profession.
- Accounting and auditing professionals deal with sensitive and confidential data. With the rise of digitalization, data security is the focus of the professionals working in the accountancy and auditing field.
- The IFRS accounting standards introduce amendments to IAS 21. The amendment is about a lack of exchangeability. Here, the change in the exchange rate happens because of government controls on exports and imports and the quantity of foreign currency. The amendment is effective from 2026.
- The IFRS 18 replace IAS 1. The new amendment says that income and expenses should be divided into three categories. The three divisions are operating, financing and investing. The subtotals in the statements should be operating profit or loss, profit or loss before financing and profit or loss before tax. The rule comes into practice in 2027.
Bottom Line:
At the school level, the commerce students learn about the accounting principles. The accounting principles create the judgemental perspective of the accountancy subject. In the college and professional course level, the commerce students learn the accounting standards. The accounting standards are proof-based and experience-based. The accounting standards enhance the application knowledge of the students. Accounting principles are the basic pillars of the subject. Accounting standards are based on the current issues and concurrent accounting operations.