Definition:
Reliability Principle is the accounting principle that concern about the reliability of financial information that records and present in the entity’s financial statements.
The principle of the reliability principle is that the transactions or event could records and present in the entity’s financial statements only if they could be verified with the reliable objective evidence.
This accounting concept is quite an importance for the users of financial information. If the information is not reliable, then the decision making will be unlikely correct.
Reliability Principle is also important for the auditor to review the accounting records of the entity during their cause of audit.
If you want to discover more, here is the best seller book for accounting principle and it also has a good explanation about reliability principle.
Explanation:
Basically, the information in the financial statements is reliable if that information could be checked, reviewed, and verified by concerning person with objective evidence.
For example, the reliable evidence for financial transactions or event that records in financial statements is including original documents (invoices, contract, receipt, banks statements, etc), information that generates from the third party, or information that prepared by the auditor. This is how reliable evident from auditor’s perspective.
Reliability Principle motivates integrity over financial reporting of an entity. Financial Statements must be true and fair and it is free from any kind of bias. This is really mean for all type of stakeholders that use financial information.
The accounting transaction is considered to be reliable if it could assure the decision maker that the information captures the condition or events its purports to represent.
Reliability Principle involved with the following accounting principle or concept:
- Neutrality: Financial statements or information must be prepared free from any bias
- Fair presentation: Financial statements must be prepared in the true and fair view
- Prudence: A high degree of caution must be taken into account when the assumption is required.
- Completeness: All financial information, transactions, and event that should be included are including.
- Accurate: Financial information must be completed and accurate.
How to know if financial information is reliable?
The data or information is reliable unless it is able to verify by the third party, and it could be measured in a systematic manner.
Here are the key factors to consider if the accounting transactions are reliable:
- Must be accurate: that means the information is support by reliable evidence like original invoice or contract. It must be able to check by the third party.
- Free from bias: information is free from any kind of bias. It is present as it is.
- Report what actually happens. The financial information must be recording what really happened. For example, if the entity got a penalty from the government amount approximately 500,000 USD. The entity should record this amount and disclose it properly in the financial statements. The users of financial information should be able to know what really happened in the entity if they use this information.
- An individual would have arrived a similar conclusion if they are using the same information.
- Be able to inspect by the third party. It means if an individual use the same accounting information, they will arrive the same or similar conclusion.
Conclusion:
In Reliability Principle, information:
- Must be accurate
- Free from bias
- Report what happened
- Be able to inspect
- Can be concluded to a similar conclusion by different users
