Objectivity Principle GAAP

Previously we studied about the Cost Principle GAAP, but here we are concerned with Objectivity Principle GAAP.

What Does Objectivity Mean in Accounting?

According To Objectivity Principle

“There should be factual and definite basis for the valuation of assets”.

For Example, if an entrepreneur purchased land for business use, then there should be factual and definite basis for the valuation of the cost of the land.

The estimated market’s value of land is not the definite or factual value so this value is not objective, because the market’s value is constantly changing.

In Accounting, Objectivity means that the information presented in Financial Statements And Reports must be free from any influence that makes it biased. There is no Conflicts of Interests which means no interested party tries to get their own benefits by influencing the information presented in Financial Statements and Financial Reporting. To do this, there must be a neutral party that presents information unbiasedly based on facts and figures and without seeing the interests of the parties concerned. Moreover, owners of the company should not affect the unbiased decisions of Internal Party i.e. Management and External Parties e.g. Qualified Auditor, etc., concerned.

For Management, it should not try to show over’s performance of business’s Profitability. For Auditor, it is a unbiased report and must be free any influence of any interested party that can affect the Audit Report both internally and externally. For An Accountant, he must prepare Financial Statements in accordance with Internal Accounting Standards (IAS) and does not take into account his own benefits or prepare in favour of any other interested parties. He further, can not intentionally conceal errors in order to get benefits from Net Profit / Net Income of the business.

At the time, when the business purchased the assets, there may be slightly difference between the cost of assets and its market value, but after some accounting period, the market’s value is constantly changing from the historical cost of the assets.

For some Assets like Fixed Assets / Non Current Assets, historical costs are shown in the Balance Sheet for showing historical records, but some assets like Accounts Receivables, Inventories and Investments are recorded at the adjusted value.

Objectivity is in interrelated with Reliability which means the more objectivity is in the Accounting, then the more reliable is the results thereof.