In accounting, the objectivity principle is a concept where the company should generate its financial statements according to solid evidence. Adhering to this principle helps to ensure that a company can produce financial statements which can present its financial position accurately. If you, a small business owner who is running a start-up company, do not know how you should complete the accounting-related tasks, you may hire an accounting firm Johor Bahru and let the professionals help you.
If a company uses an objective opinion when generating financial statements, then the investors will be able to rely on the financial (Also see Why Project Accounting Is The Future Of The Financial World) information when they want to assess the cash flow and financial results of a company.
The objectivity principle aims to prevent the accounting department or the management of a company from generating financial statements which are biased based on their own prejudice or opinions. As an instance, the management of a company may own a large stake in it, and it tends to report optimistic results for a company. However, a more objective opinion will bring to a report that includes more conservative results. Hence, this shows that such a situation will cause the financial results of a company to be skewed from the truth.
Another situation would be when the company’s management thinks that it will be the beneficiary of a payout from a lawsuit, where it may receive a huge sum of money shortly. So, in this case, it will probably accrue the revenue, which is related to the payout, although based on the evidence, this result may not take place. The management should avoid doing so, and a more objective way of handling this issue is to wait and gather more information before it makes this determination.
External auditors would request their clients to generate financial statements according to the objectivity principle. This makes it easier for them to use evidential events to confirm that the financial information in those statements is accurate. If a company possesses a good system in record archiving, it will be able to follow the objectivity principle easily. Hence, the auditors (Also see Auditing the Sales and Collection Cycle) will be able to find the information that provides evidence to the total balances recorded in the financial statements without taking much time and effort.
We may also look at the objectivity principle from the perspective of an auditor (Also see Unqualified Opinion in an Audit Report). If an auditor has worked for a company before, and now he has been assigned to handle its audit, he may not be objective about the audit report. This may depend on the relationship between him and the business owner when he worked in that company.