Reliability principle - What is the reliability principle?
The reliability principle is an accounting principle used as a guideline in determining which financial information should be presented in the accounts of a business.
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The reliability principle is one of the important accounting principles, and is used as a means to ensure that the accounting statements and records of a business produce the most accurate information available.
The reliability principle (or objectivity principle) is the basis of many accounting requirements set out by GAAP or IFR standards. This principle is laid out as a guideline to ensure that all businesses comply with correct and accurate accounting recording and practices.
What does the reliability principle mean?
The accounting rule of the reliability principle concerns the financial information of a business, and states that the information presented in the accounting records and statements should be the most accurate and relevant information available.
In other words, in order for financial information to be useful for auditors, managers, and stakeholders, it needs to be relevant. Relevant information includes anything that can be considered useful, important, timely, and understandable for decision making - both internally and externally.
The purpose of the reliability principle is to ensure all business accounting records and statements are true and fair.
Important details of reliability principle
The reliability principle aims to ensure that all transactions, events, and business activities presented in the financial statements is reliable. Information is considered reliable if it can be checked, verified, and reviewed with objective evidence. Furthermore, a user should be able to fully rely on the information presented to be an accurate and faithful representation of that which it stands to represent.
This exploits an accounting system which allows a business or entity to record expenses only if there is valid proof - which could be in the form of an invoice, receipt, original documentation, or information from a third party.
If the information is not reliable, you are risking that any business decision based on these financial statements will be incorrect or mislead. For example, significant omissions or misstatements from a financial statement will reduce the reliability of the information presented.
Example of reliability principle
- Company X is being sued for damages by Company Y. If Company X loses the case, they will have to pay a significant amount in settlement money, which could threaten the financial stability of their company.
This information needs to be disclosed in the financial statements of Company X, since it is useful for all interested readers to be aware of this, and not to be mislead by their current position.
Debitoor and reliability principle
A growing business can benefit from an automated accounting and invoicing software such as Debitoor. Debitoor allows you to generate and produce financial reports of your business at any given time. Additionally, it can assist you in managing your accounts and reporting, and help determine the current financial standing of your business.