The concept of objectivity states that the financial statements of the business should be independent and free from any biasness which means that the financial statements need to be based on the solid evidences, facts & figures so that the records are not based on the biased management’s opinions.
Explanation with example:
The objectivity concept defines that the financial record of the business should be prepared on the basis of solid evidences and figures and are not influenced by the management. This concept assures that financial statements are reliable i.e. the financial statements are trustworthy and free from biasness and are verifiable i.e. the information disclosed can be verified with the help of evidences. Even one of the reasons to adopt historical cost method is the concept of objectivity as the cost price of the product can be found in the invoice, cash memos or delivery challans but the market price is difficult to ascertain and requires estimations and judgments.
For example if a company A Inc. purchased machinery from a vendor B Inc. worth $ 100,000. The vendor has to issue invoice for the same transaction that will consist of the date of transaction, number of units sold and the selling price etc. Now the invoice issued by the B Inc. is the evidence of purchase of machinery for A Ltd where $100,000 will be the cost of machinery for A ltd. and on the other hand the invoice is sales evidence for the B Inc.
Even the salary slip, tax challans, cash receipt notes, goods receipt notes, delivery challans, cash payment vouchers are all the examples of evidences that support the reporting of any financial transaction.
The advantages of Objectivity concept are as follows:
1. The concept of objectivity ensures that the accounting records are not misstated and based on the conclusive evidence.
2. The evidences are required at the time of audit when the auditor is required to comment upon the true & fairness of the financial statements.
3. The objectivity principle prevents the management to show better financial performance of the business than it actually is.
The disadvantages of Objectivity concept are as follows:
1. Sometimes the evidence can be lost and getting evidences for small transaction can be time consuming and cumbersome.
2. Every transaction cannot be based on the evidences like provisions for bad & doubtful debts, provision for income tax etc. therefore there estimation is based on the management’s opinions and judgments.