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Accepted accounting principles are represented by rules and conventions. These principles contribute to the likelihood that a company's financial statements provide reliable information about its operating results and financial position, each of which is useful in decision-making processes. It is therefore essential that the information presented is objective, meaning that it is impartial, unbiased and free from subjective valuation.
Objectivity requires that measurements presented in financial statements be based on verifiable evidence such as an electronic or paper trail that supports the transactions represented in the statements. In practical terms, an essential attribute of each measurement in the statements is that an identical result would be obtained by two independent observers, not influenced by personal views or perceptions.
The reliance on verifiable evidence during the measurement of financial results makes it possible to compare the financial statements of more than one period and more than one firm. This is possible only if information presented in financial statements is objective, which, in turn, provides assurance that the data is reliable and uniform. Objectivity requires the accountant to remain impartial in decision-making processes that lead to the documentation of transactions and the creation of the financial statements, which means that financial facts are reported that are free of personal prejudices. Objectivity also requires the preparer of financial statements to remain intellectually honest, meaning that he interprets accounting policies in a truthful manner. In addition, an accountant charged with preparing financial statements for a client must avoid any conflict of interest in dealing with a client, which precludes either a personal or business relationship between the accountant and the client.
Original Cost Example
Jamie Pratt points out in "Financial Accounting in an Economic Context" that assets that include prepaid expenses, intangible assets, securities and property, and plants and equipment should be valued on the balance sheet at original cost, which is the price that is paid when an asset is acquired. Alternatively, these assets can be valued at net book value, which is the original cost adjusted for depreciation or amortization. As Ms. Pratt indicates, the use of original cost is acceptable in this instance because the reliability of the cost data is supported by documented evidence, which allows the data to be objectively verified.
Present Value Example
While accounting for assets at original cost is preferred in many instances, Jamie Pratt does relate in "Financial Accounting in an Economic Context" a situation in which an asset is valued and reported in the balance sheet at the net present value. In this instance, the principle of objectivity allows contracts to be reported at present value -- representing the future cash flows associated with the asset discounted to the present -- because the future cash flows resulting from the contract can be objectively determined.
- "Financial Accounting in an Economic Context”; Jamie Pratt; 2011
- “Auditing for Dummies”; Maire Loughran; 2010
- “Barron’s Dictionary of Accounting Terms”; Siegel et al; 2005
- “Financial Accounting: An Introduction to Concepts, Methods and Uses”; Stickney et al.; 2009
- "Accounting Handbook"; Siegel et al.; 2006
Billie Nordmeyer works as a consultant advising small businesses and Fortune 500 companies on performance improvement initiatives, as well as SAP software selection and implementation. During her career, she has published business and technology-based articles and texts. Nordmeyer holds a Bachelor of Science in accounting, a Master of Arts in international management and a Master of Business Administration in finance.