In Financial Accounting, both Rules and Policies help determine how a company prepares its financial statements. So, the differences between the two concepts might not be readily obvious.
Generally, rules and policies combine to form the body of guidelines that guides a company’s financial statements. The goal is to ensure that a company’s financial statements conform to the legally accepted standards.
But before we consider what makes rules and policies different, it is important to understand what each of them means and the connection between them.
What are the Rules?
Rules in Accounting are a set of principles that “must be” adhered to by a company in the preparation and presentation of financial statements.
They are the legal guidelines regulating the recording and reports of the financial data of companies within a particular state or country. Usually, these rules are set by the financial accounting governing bodies in a place.
In the United States, the Generally Accepted Accounting Principles (GAAP) specify the rules guiding the quality of the financial reports of companies. The GAAP is set by the Financial Accounting Standards Board (FASB).
It is a requirement for all publicly traded companies in the US to adhere to the GAAP. It also guides the activities of non-publicly traded companies too.
Failure to adhere to these rules might attract legal actions against a company by the governing bodies.
Cost, Accrual, Conservatism, Monetary Unit, Full Disclosure, and Reliability principles are some of the rules that consistent with the GAAP.
What are the Policies?
A company’s accounting policies are the standards set by the company for preparing its financial statements.
Simply put, policies are internally established procedures for financial reports. In essence, it is a company’s specific guidelines for following the general rules. They are specified by a company itself and not by external bodies.
Company policies are designed to help the company achieve its goals while still conforming to the generally specified rules.
Rules Vs Policies
To draw the line between these two concepts, you need to understand the connection between them.
Rules determine generally accepted financial report practices, while company policies are based on rules.
From its policies, a company can also derive internal rules for its operations.
The internal rules ensure that company policies are properly adhered to. The policies are designed to help the company maximize its potentials while conforming to the general rules.
The differences between Rules and Policies can be summarized thus:
While Rules are general accounting principles binding every company, policies are implemented by a company to help her adhere to the rules.
Rules are specified by the Financial Accounting governing bodies such as the FASB and IFRS. On the other hand, companies decide their policies and how to implement them.
Rules help regulate and maintain the quality of financial reports within a territory. Policies help a company to tailor the rules to achieve its goals.
Having a lawsuit filed against a company for violation of rules can be detrimental to the reputation of the company. To avoid this, every company needs to ensure that it is guided in all its activities.
Adherence to rules by making effective policies will help a company stay out of trouble and maximize its aims and objectives.