Define Objectivity Principle:

"The objectivity principle, also known as the principle of objectivity, is a fundamental concept in accounting and financial reporting. It states that financial information should be recorded, presented, and reported in a manner that is unbiased, factual, and free from personal bias or subjective judgment."

Explain Objectivity Principle:

What is Objectivity Principle? 

According to the objectivity principle, financial statements and reports should reflect the economic reality of a business or organization rather than being influenced by personal opinions, preferences, or interests. It requires that accounting transactions and events be supported by objective evidence and verifiable data.

To ensure objectivity in financial reporting, accountants and financial professionals are expected to adhere to certain practices and guidelines. These include:

1. Reliance on reliable and verifiable data: Financial information should be based on factual data obtained from reliable sources such as bank statements, invoices, receipts, and other supporting documents. This helps ensure the accuracy and integrity of the reported information.
   
   
2. Independence and impartiality: Accountants and financial professionals should maintain independence and avoid conflicts of interest that may compromise their objectivity. They should exercise professional judgment based on facts and applicable accounting standards, rather than personal interests or biases.
   
   
3. Consistency and comparability: Financial information should be presented consistently over time to allow for meaningful comparisons. Consistency in accounting policies and practices helps ensure that financial statements are not manipulated to produce desired outcomes.
   
   
4. Proper disclosure: Any significant events, uncertainties, or potential biases that may affect the objectivity of the financial information should be transparently disclosed in the financial statements or accompanying notes. This promotes transparency and helps users of financial statements make informed decisions.

The objectivity principle is essential for maintaining the credibility and reliability of financial reporting. It enables users of financial statements, such as investors, creditors, and stakeholders, to have confidence in the accuracy and fairness of the information presented. By adhering to the principle of objectivity, accounting professionals strive to provide unbiased and reliable financial information that reflects the true financial position and performance of an entity.

Let's consider an example that demonstrates the application of the objectivity principle with numbers:

Suppose a company, ABC Corporation, purchases a new computer system for its office. The objective principle requires that the financial information related to this transaction be recorded, presented, and reported in an unbiased and factual manner.

Here's how the principle of objectivity can be applied in this scenario:

1. Reliance on reliable and verifiable data: The company should obtain and rely on objective evidence to record the purchase of the computer system. For example, they should keep the purchase invoice from the vendor, which provides details such as the date of purchase, the item description, the quantity, and the cost.
   
   
2. Independence and impartiality: The accounting personnel responsible for recording the transaction should be independent and unbiased. They should not have any personal interests or biases that could influence how the transaction is recorded. The decision should be based on the factual data and relevant accounting policies.
   
   
3. Consistency and comparability: The purchase of the computer system should be consistently recorded following the company's accounting policies. For instance, if the company capitalizes all equipment purchases, the computer system should be capitalized as well. This ensures that the financial statements are comparable over time and allow for meaningful analysis and decision-making.
   
   
4. Proper disclosure: In the financial statements or accompanying notes, the company should transparently disclose any relevant information about the computer system purchase. This may include details such as the useful life of the system, any financing arrangements, or any warranties that came with the purchase. Proper disclosure provides additional information to the users of the financial statements and helps them understand the context and impact of the transaction.

By applying the objectivity principle, ABC Corporation ensures that the purchase of the computer system is recorded accurately, based on verifiable evidence, and free from personal bias.

This promotes transparency and reliability in the financial reporting process, allowing stakeholders to make informed decisions based on objective financial information.