According to the objectivity principle, financial and accounting data must be neutral and free of personal bias. This suggests that financial reporting, such as the financial statements of a corporation, must be backed by facts rather than speculation. In some circumstances, professional accountants must express their ideas, however, the objectivity criteria specify that opinions cannot serve as the only basis for an accounting method.
What Is the Objectivity Principle?
The US accounting processes consist of rules, guiding principles, and concepts. These are referred to as “GAAP” or “Generally Accepted Accounting Principles.” GAAP incorporates a range of fundamental ideas to ensure financial reporting is very dependable and verifiable. The notion of objectivity is one of these criteria.
Example of objectivity principle
The goal notion and the whole of GAAP are designed to enhance the value of financial statements for users and investors. Specifically, the idea of objectivity contributes to the legitimacy and verifiability of financial accounts. For investors and end-users, dependability indicates that financial data is trustworthy and dependable. Verifiability denotes that the outcomes can be reproduced and the financial data can be backed by evidence. The importance of financial accounts stems from their verifiability and reliability.
In other words, GAAP is intended to guarantee that financial statements are based on facts and not assumptions or biases. Accountants who have close links with firms may be disqualified from working on their financial records because they may be prejudiced. A certified public accountant who owns stock in a company may wish for its success. A conflict of interest exists here. The objectivity principle attempts to eliminate such issues.
The advantages of the concept of objectivity
The objectivity concept provides the following advantages:
- Transparent and trustworthy data are the result of presenting information fairly. Accounting information is used by several parties, including investors, stakeholders, suppliers, and government agencies.
- It proves that the information provided in books is completely correct since it is independent of personal opinion.
- It contributes to the development of a company’s goodwill.
- Firms that mislead information are subject to penalties.
Problems with the Concept of Objectivity
The following are some disadvantages of the concept of objectivity:
- As a natural byproduct of their day-to-day activities, businesses generate a significant amount of data. All of these entries have to be recorded, which is an expensive process that involves a lot of steps.
- The company’s regular operations will be thrown off since this strategy requires a lot of time.
- The profit margin suffers since it is necessary to work with personnel from outside the company in order to carry out an audit effectively.
According to the objectiveness principle, the financial statements of a corporation need to be supported by reliable evidence in order to be considered accurate. By adhering to this recommendation, a company’s management team and accounting division will have a better chance of avoiding the practice of presenting biased financial statements based on their personal ideas and biases.