Objectivity principle is a rule in accounting stating that "accounting measurements and accounting reports should use (Introduction to accounting... 2005, s. 100):
- verifiable data.
In other words, accountants, accounting systems, and accounting reports should rely on subjectivity as little as possible". Accounting requires the use of only objective data (even if the data is negative for an entity) as opposed to subjective data. The aim of using objectivity principle is to defend the entities from "corrupting influence" that comes from adapting subjectivity when keeping company's accounting records (QuickBooks… 2015, s. 24-25).
The objectivity principle requires that institutions data and financial statements data in the records kept by accountants are based on impartial evidence (Survey of accounting 2009, s. 23). While in accounting practice the point of view of an accountant plays an important role during financial statement preparation, it is crucial that all the data provided by accountants is supported by relevant documents. This makes financial statements authentic and ensures they represent the actual condition of an institution (Financial accounting: concepts… 2010, s. 20).
Objectivity principle in practice
In order to maintain the trust of users of financial statements, the objectivity concept needs to be strictly supported. This is the reason why evidence such as "invoices and vouchers for purchases, bank statements for the amount of cash in the bank, and physical counts of supplies on hand" needs to be kept by accountants. These documents are easy to verify and objective. There are also other cases where "judgements, estimates, and other subjective factors" can be utilized while preparing financial statements but accountants should be vary to always use the evidence that is most objective (Survey of accounting 2009, s. 23).
Interpretations of the objectivity principle
The principle has been interpreted in many different ways. Below are different interpretations (The cultural shaping… 1995, s. 46):
- It is free from personal biases, so it is strictly impersonal.
- It is easily verifiable because we possess document evidence.
- It is a result of an agreement in a particular group of measurers so it is implied that objectivity will be contingent on this group of observers.
- An indicator of the objectivity principle can be "the size of the dispersion of the measurement distribution".
Examples of Objectivity principle
- All financial statements must be based on solid evidence and should not be based on assumptions or personal opinions. This means that all numbers and figures must be documented and supported with evidence.
- Financial statements should be prepared in accordance with accepted accounting principles and standards. This means that the statements should be prepared following the same guidelines and conventions as other financial statements.
- All transactions should be recorded in the same way each time, regardless of their size or complexity. This means that all transactions should be treated equally and recorded in the same way.
- All assets and liabilities should be measured using the same method. This means that assets and liabilities should be measured using the same measurement system, such as the historical cost or fair value method.
- All transactions should be recorded in the same accounting period. This means that all transactions should be recorded in the period in which they occurred, regardless of when they are paid or received.
- All financial statements should be prepared on a timely basis. This means that statements should be prepared and released in a timely manner, allowing investors and other stakeholders to make informed decisions.
Advantages of Objectivity principle
The Objectivity principle states that accounting measurements and accounting reports should use reliable, verifiable, and impartial evidence in order to maintain accuracy and integrity. This principle provides many advantages to those using and interpreting financial information, including:
- Improved accuracy and reliability of financial data: The objectivity principle ensures that the financial data is based on reliable, verifiable, and impartial evidence. This helps to reduce the chances of errors and inaccuracies in financial reporting.
- Increased transparency and trustworthiness of financial information: By relying on objective evidence, financial information is more trustworthy and reliable. This helps to improve the transparency of financial transactions and helps to build trust between the parties involved.
- Enhanced ability to make informed decisions: By relying on reliable and impartial evidence, users of financial information are able to make informed decisions. This helps to reduce the chances of making decisions based on inaccurate information.
- Reduced risk of financial misstatement: The objectivity principle helps to reduce the risk of financial misstatement. This helps to ensure that financial statements are prepared accurately and with integrity.
Limitations of Objectivity principle
The Objectivity principle states that accounting measurements and accounting reports should use objective, verifiable facts. However, there are certain limitations to the effectiveness of the Objectivity principle:
- Accounting information is often subjective and open to interpretation, making it difficult to rely solely on objective facts.
- Objectivity is difficult to maintain when dealing with matters of opinion, such as the valuation of assets or the assessment of risk.
- It is not always possible to obtain objective evidence to support certain accounting decisions.
- The principle of objectivity does not take into account the potential for bias or conflict of interest.
- Objectivity can be compromised by external factors, such as pressure from stakeholders to present information in a favourable light.
- It may be difficult to determine which facts are relevant when making decisions, leading to potential errors in judgement.
One approach related to the Objectivity principle is the use of neutral and unbiased language in accounting reports. This ensures that the information presented is free from any personal or subjective bias. Additionally, it is important to use accurate and verifiable information when compiling accounting reports, to ensure that the numbers presented are reliable and accurate. Other approaches related to the Objectivity principle include:
- Materiality principle: This principle states that only information that has a material effect on the financial statements should be reported. This means that only information that could affect the decisions of users of financial statements should be included in accounting reports.
- Conservatism principle: This principle states that any uncertainty in an accounting report should be resolved in favour of caution. This means that when there is uncertainty as to which accounting treatment to use, the most conservative approach should be applied.
- Going concern principle: This principle states that businesses should be assumed to continue in operation for the foreseeable future. This means that the financial statements should be prepared on the basis that the company will continue to operate and not be sold or liquidated in the near future.
In conclusion, the Objectivity principle is a key rule in accounting, and there are several other approaches related to it such as the materiality principle, conservatism principle, and going concern principle. These principles ensure that financial statements are presented in a fair and accurate manner, free from any personal or subjective bias.
- Banerjee B.K. (2010), Financial accounting : concepts, analyses, methods and uses PHI learning, s. 20.
- Hand L., Isaaks C., Sanderson P. (2005), Introduction to accounting for non-specialists Thomson learning, s. 100.
- Nelson S.L. (2015), QuickBooks 2015 all-in-one for dummies John Wiley & sons, s. 24-25.
- Riahi-Belkaoui A. (1995), The cultural shaping of accounting Quorum books, s. 46.
- Warren C.S. (2009), Survey of accounting South-western CENGAGE learning, s. 23.
Author: Justyna Szczepaniec