Objectivity concept

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Objectivity concept is one of 12 basic accounting concepts (among: money measurement, going concern, accounting period, cost, duality, revenue recognition, matching, full disclosure, consistency, prudence and materiality)[1]. According to the objectivity concept, an accounting transaction should be free from accountants bias. All records should be reported on financial statements with having objective evidence in the background. It means all transactions should be covered with documents and vouchers that could be verified. If the rule is not kept, the users of financial statements cannot be sure about its confidence and quality[2].

The objectivity concept also relates to sociology and philosophy. Worldwide it is negotiated concept, understood locally in many ways. It has many layers of interpretations, depending on perception and might result in misunderstandings depending on the culture. It mainly differentiate in perceptions of truth. In journalism, objectivity means that all parties have opportunities to be heard and all point of views are presented[3].

In science disciplines, objectivity is achieved by using defined and comparable measurements, patterns and experimentally confirmed hypotheses that become theories.

Fig.1. 13 basic accounting concepts

Examples for transactions fulfilling objectivity concept (accounting)

Below are presented two purchase transactions that fulfilled the objectivity concept[4]:

  • Purchase transaction of materials is supported with cash receipt with value of money paid,
  • Purchase transaction of machine is supported with invoice and delivery document,
  • Bank statement proving the amount of cash in the bank,
  • Supplies on hand counted physically and confirmed with documentation,
  • Recording transactions using double-entry accounting, which ensures that all transactions are recorded in at least two accounts (i.e. a debit and a credit) and are balanced. This helps to ensure that the financial statements are accurate and complete.
  • Keeping accurate and complete records of all transactions, including invoices, receipts, and other supporting documents. This allows for easy verification of the transactions and helps to ensure that they are free from bias.
  • Using an independent auditor to review the financial statements and ensure that they are accurate and free from bias. This provides an additional level of assurance that the financial statements are accurate and objective.
  • Applying Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) in the preparation and presentation of financial statements, which provides a framework for consistent, objective and transparent financial reporting.
  • Maintaining a separation of duties in the accounting department to avoid conflicts of interest and ensure the integrity of financial information.
  • Making sure that management, who is responsible for financial reporting, is not involved in the day-to-day transactions, such as, approving the invoices, issuing the cheques and recording the transactions in the books of accounts.

Overall, the objective of objectivity concept in accounting is to ensure that financial information is unbiased, accurate, and based on verifiable evidence, in order to promote trust and confidence in the financial statements.

Reasons of keeping objectivity concept (accounting)

Objectivity concept is important in accounting from the following reasons[5]:

  • Objectivity in accounting creates a basis for tracking historical cost, which is essential for measuring the performance of a business over time. By recording transactions using verifiable evidence, accountants can ensure that the historical cost of an asset is accurately reflected in the financial statements.
  • Recording transactions using objective evidence, such as invoices and receipts, creates documentary evidence of transactions. This is important for providing transparency and accountability, as well as for auditing and legal purposes.
  • The objective principle ensures that transactions are recorded at the actual cost that was paid, rather than at an inflated or inflated value. This helps to ensure that the financial statements accurately reflect the financial position of the business.
  • Recording transactions at their actual cost also helps to ensure that assets are recorded at their fair value. This is important for providing a clear picture of the company's financial position, as well as for making important business decisions.
  • The principle of objectivity enables verification of transactions and documents, which helps to ensure the accuracy and integrity of the financial statements. This is important for providing assurance to stakeholders that the financial statements are reliable and unbiased.
  • Objectivity in accounting also helps to record market value of an asset at the moment, as the value of an asset can vary from person to person or place to place. This is important for providing a fair and accurate representation of the company's financial position.
  • The objective principle is also important for determining the market value of an asset, as it is difficult to assess the value of an asset before it is sold. This is important for making decisions about the sale or purchase of assets, as well as for determining the value of the business.
  • Objectivity in accounting also helps to simplify comparisons in the case of any judgments or estimates. By recording transactions using verifiable evidence, accountants can ensure that the financial statements are accurate and unbiased, which makes it easier to make comparisons with other businesses or financial periods.
  • The objective principle in accounting also helps to identify other subjective factors in preparing financial statements. By focusing on objective evidence, accountants can identify and eliminate any bias or subjectivity that may be present in the financial statements.
  • The objective principle in accounting helps to estimate future costs at better accuracy. By recording transactions using verifiable evidence, accountants can ensure that the financial statements are accurate and unbiased, which helps to make more accurate predictions about future costs.
  • By adhering to the objective principle, users of financial statements can be sure that they can rely on the information presented in the financial statements. This helps to promote trust and confidence in the financial statements, which is important for making important business decisions.
  • Financial statements prepared in a neutral manner. Objectivity in accounting ensures that the financial statements are prepared in a neutral manner, free from bias and based on verifiable evidence. This helps to ensure that the financial statements are accurate, reliable and unbiased, which is important for providing assurance to stakeholders.

Footnotes

  1. ↑ NCERT, (2015), p. 24
  2. ↑ NCERT, (2015), p. 32, Warren C., (2008), p. 32
  3. ↑ Frey E., (2007)
  4. ↑ NCERT, (2015), p. 32, Warren C., (2008), p. 32
  5. ↑ NCERT, (2015), p. 32,Warren C., (2008), p. 32, Deepak S., (2016), p. 3


Objectivity concept — recommended articles
Accounting Convention — Objectivity principle — Accounting Principles — Accounting documents — Accounting manual — Accrual method — Materiality principle — Consistency principle — Time period concept

References

Author: Katarzyna Żurek

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