Introduction
It is one of the important accounting principles and is the basis of many accounting requirements set out in either of generally accepted accounting principles or alternatively International financial reporting standards. Lets brief it a little using the real time examples. Suppose that you have purchased certain cosmetics from a departmental store and subsequent to your purchases you are handed in a cash memo detailing your purchases quantity, rate, the value of each item and the total bill. This cash memo serves as the source document for the accountants and it is sufficient and objective evidence underlying the specific record of the transaction.
Reliability principle opines that only those transactions should become part of your accounting information system that are supported by an objective commercial document such as cash memo in the above case.
Examples of Objective Documents in relation to Reliability Receipts
Following documents serve as objective and appropriate documents and support the transactions recorded on the basis of them:
1. Purchase Receipts It is issued subsequent to any specific purchase that relates to either goods or services. The seller issues the same to the buyer.
2. Checks or canceled checks They serve as evidence in relation to journal entries which involve banks. In the case of receipt or issuance of a check, the bank is debited or credited respectively. Canceled checks serve as evidence of reversal entries involving bank accounts.
3. Bank Statements Bank statement serve as evidence and support the closing balance of the specific bank account that is reported under the current asset section of the Balance Sheet.
4. Promissory Notes Promissory notes serve as appropriate evidence in relation to any specific account payable balance at the reporting date.
Auditors and Reliability Principle
Auditors seek audit evidence before they can opine about the fairness of the financial reporting practices of the specific organization. Source documents discussed as above serve as appropriate audit evidence for them which assists them concluding as a whole about the fairness of the financial reporting system of the organization.
Documents that are more Reliable
Usually, the commercial documents that are internally generated are not considered as good evidence of the transactions. The commercial documents that are issued by the third parties serve as good and objective evidence of the accounting transactions used to be recorded. A perfect example of the third party evidence is Bank statement. Bank statement serves as evidence and supports the closing balance of the specific bank account that is reported under the current asset section of the Balance Sheet. It is acceptable by the auditor as evidence in relation to specific bank account balance which is reported by the management in the notes to the financial statements.
IFRS and the principle of Reliability
IFRS is a globally implemented financial reporting framework. IFRS requires that only those transaction should become part of the financial statements which can be measured reliably to sufficient extent. This is source documents or the third party evidence which IFRS is talking about and hence assists in the reliable measurement of the transactions.
Conclusion
Reliability principle opines that only those transactions should become part of your accounting information system that are supported by an objective commercial document. Auditors seek audit evidence before they can opine about the fairness of the financial reporting practices of the specific organization. Reliability principle significantly assists them in the audit of the financial statements of the organization and this way these audited financial statements serve as a benchmark for the decision making of the stakeholders.
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