Reliability principle
/What is the Reliability Principle?
The reliability principle is the concept of only recording those transactions in the accounting system that you can verify with objective evidence. Examples of objective evidence are purchase receipts, cancelled checks, bank statements, promissory notes, and appraisal reports. Note that the examples shown here are of documents generated by other entities (customers, suppliers, valuation experts, and banks). Since they are third parties, documents supplied by them are considered to be of higher value as objective evidence than documents created internally.
The reliability principle is particularly difficult to meet when you are recording a reserve, such as an inventory obsolescence reserve, a sales returns reserve, or an allowance for doubtful accounts, since these reserves are essentially opinion-based. In these cases, it is particularly important to justify your actions with a detailed analysis of the reasons for the reserve. This is frequently based on verifiable historical experience with similar transactions, and which you expect to be repeated in the future.
From a practical perspective, only record those transactions that an auditor could reasonably be expected to verify through normal audit procedures. If you can reasonably expect that an auditor cannot verify your transaction, then it is likely that the auditor will request a reversal of the entry - so don’t record it in the first place.
Terms Similar to the Reliability Principle
The reliability principle is also known as the objectivity principle.
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Example of the Reliability Principle
Coconut Manufacturing purchases a new piece of machinery for $100,000. The company records the transaction in its books based on the actual invoice provided by the machinery supplier. This transaction represents a good application of the reliability principle, for the following reasons:
Objective evidence. The purchase is supported by a valid, documented invoice and payment receipt from the supplier. These documents serve as verifiable proof of the transaction amount and date.
Free from bias. The $100,000 cost is recorded as it appears on the invoice, without subjective estimates or adjustments by the company's management. This prevents inflation or deflation of the asset's value.
Consistency and auditability. If external auditors examine the financial records, they can confirm the machinery purchase by reviewing the invoice, payment records, and shipping documents.