Reliability

RELIABILITY CONCEPT is a quality of information that assures decision makers that the information represented in the financial statements captures the actual conditions and events of the reported entity.

• Most business accountants use the reliability

principle as their guide when deciding which financial

information to use in their company's accounts.

• Accounting information must also be neutral.

• It cannot be selected, prepared or presented to

favour one set of interested users over another.

The three characteristics – verifiability , faithful representation and neutrality.

OBJECTIVITY PRINCIPLE states that accounting

information will be recorded on the basis of objective evidence. Objective evidence means that different people looking at the evidence will arrive at the same values for the transaction. Simply put, this means that accounting entries will be based on fact and not on personal opinion or feelings.

Objectivity

CONSERVATISM PRINCIPLE provides that accounting for a business should be fair and reasonable.

Accountants are required in their work to make evaluations and estimates, to deliver opinions, and to select procedures. They should do so in a way that neither overstates nor understates the affairs of the business or the results of operation.

Conservatism

A classic example is inventory where the replacement cost is less than the actual cost. The accountant must decide whether to leave the inventory at cost or to reduce the inventory amount to its replacement cost. Conservatism directs the accountant to reduce the inventory to the lower amount.

Example

The matching principle states that all expenses must be matched in the same accounting period as the revenues they helped to earn.

In order to reach accurate net income figure, the expenses incurred to earn the revenues is recognized during the accounting period in that time period and not in the next or previous.

MATCHING PRINCIPLE

Example

• Sales commissions expense should be reported in the period when the sales was made (and not reported in the period when the commissions were paid).

• If a company agrees to give its employees 1% of its 2012 revenues as a bonus on January 15, 2013, the company should record the bonus as an expense in 2012 and the amount unpaid at December 31, 2012 as a liability.

Why is Matching Principle Important to Accountants?

Is one of the basic accounting principles; it is followed to create a consistency in the income statements, balance sheets, etc.

Financial statements may be greatly distorted if expenses are recognized earlier rather than later and vice versa; jeopardizing the quality of the statements and providing an unfair representation of the financial position of the business.

For example: Recognizing an expense earlier than is appropriate lowers net income

(understatement) Recognizing an expense later than appropriate raises net income.

(overstatement) 

Expense Revenue

THE END

By : RINI & PROMI