A rules-based accounting framework provides specific rules that dictate how economic activities should be accounted for. The main advantage of a rules-based accounting framework is the consistency it provides since the same accounting treatments must be applied to the same economic activities. The main disadvantage is that it is not feasible to include rules for all possible economic activities in a given framework. This can lead to the manipulation of the financial reporting when accounting for economic activities for which there are no rules since the rules that lead to the most favorable outcome may be deliberately selected. Accounting frameworks that are developed and implemented by governments themselves are typically rules-based accounting frameworks.
A principles-based accounting framework provides broad guidelines rather than specific rules. The main advantage of broad guidelines is their relevance to a wider scope of economic activities which reduces the possibility that economic activities that must be accounted for will fall outside the scope of the framework. The main disadvantage of broad guidelines is they may lead to different accounting treatments being applied to similar economic activities since professional judgement must be applied to determine the appropriate accounting treatment and since this professional judgement may be applied inconsistently. Examples of principles-based accounting frameworks are the International Financial Reporting Standards (IFRSs) and the International Public Sector Accounting Standards (IPSASs).
A principles-based accounting framework provides broad guidelines rather than specific rules. The main advantage of broad guidelines is their relevance to a wider scope of economic activities which reduces the possibility that economic activities that must be accounted for will fall outside the scope of the framework. The main disadvantage of broad guidelines is they may lead to different accounting treatments being applied to similar economic activities since professional judgement must be applied to determine the appropriate accounting treatment and since this professional judgement may be applied inconsistently. Examples of principles-based accounting frameworks are the International Financial Reporting Standards (IFRSs) and the International Public Sector Accounting Standards (IPSASs).