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.