objectivity principle

What is Objectivity Principle?

Objectivity principle of accounting states that each and every financial transaction should be supported with evidence. This means that the accounting information should be independent. It should be prepare keeping all the bias aside. Accountant should record the transactions on the basis of evidence not on the basis of his or her opinion.The main purpose of the objectivity principle is to provide authentic and reliable financial statements.

How to know whether the accounting information in the books of account is accurate. Well, this concept focuses on to provide reliable financial information to the end users.Each and every information in the books of account should be verifiable with the help of the evidence available against it. Because of this reason only, this concept is also known as Verifiability or evidence concept.

The whole concept of objectivity depends upon the two main things – relevance and reliability. In addition to this, objectivity principle helps the Chartered accountants and auditors to audit the accounts and present the true and fair financial statements in front of investors.

Example of Objectivity Principle

ABC company buys an equipment of Rs. 10,00,000. When company placed the order it must have received a bill. And when the company has made the payment, it should also have received a receipt. According to principle of objectivity, the company should keep all the bills and receipts that provides the proof of the transaction. This will also make it easy for the company at the time of its audit.

Let’s take another situation. Shyam has given the charge of accountant to prepare the financial statement of company XYZ Inc. He asks for the records of the payments and receivables. However the owner says it will take time to get the records, hence use the numbers in the accounting system. This is clearly the violation of principle of objectivity.

Let’s discuss one more example. Suppose a company needs a loan for the purchase of a machinery which it needs to imports from other country. It approaches the bank. The bank asks for the financial statements of the company. Instead of giving the charge of preparing the statement by an independent party, the company accountant prepares it from the accounting records not on the basis of records available. This also violates objectivity principle.