Accountancy · Ch 2 — Theory Base of Accounting
Objectivity Concept
Objectivity Concept
The Core Idea: Why Objectivity Matters
Accounting is meant to be a reliable, factual record of a business's financial life. The Objectivity Concept is the guardrail that keeps that record honest. It demands that every single transaction recorded in the books must be backed by verifiable, documentary evidence — a receipt, an invoice, a contract, a bank statement. This evidence is called a voucher.
The purpose is simple: to eliminate personal bias, guesswork, and manipulation. An accountant should not record a transaction based on their opinion, a rumour, or a hopeful estimate. They must record it based on a hard, objective fact that another person could independently check and confirm.
The Objectivity Concept is the bedrock of accounting reliability. Without it, financial statements would be subjective and untrustworthy.
How Objectivity Works in Practice
Consider a few common transactions. The rule is: no voucher, no entry.
- Purchase of materials for cash: The accountant records this only after seeing the cash receipt from the seller. That receipt is the objective proof of the payment.
- Purchase of materials on credit: The entry is based on the invoice (bill) from the supplier and the delivery challan (proof of goods received). These documents together prove the transaction happened and the amount owed.
- Purchase of a machine: The receipt for the amount paid is the documentary evidence for the machine's recorded cost. This receipt provides an objective basis for verifying the entire transaction.
The Link to Historical Cost
This concept is the primary reason accounting uses Historical Cost (recording an asset at its original purchase price) rather than Market Value (what it could be sold for today).
Why? Because the historical cost is objective. You can pull out the receipt or the sale deed and prove, without a doubt, that ₹5,00,000 was paid for that machine.
The market value, on the other hand, is subjective. It changes from day to day, from person to person (one valuer might say ₹6,00,000, another ₹6,50,000), and from place to place. If accountants used market value, the financial statements would be based on opinion, not fact. Objectivity would be lost.
A common mistake is to think the Objectivity Concept means the recorded value is correct in an economic sense. It doesn't. It only means the recorded value is verifiable. The machine might be worth more or less today, but the books show what was actually paid, because that is the objective fact.
The Accounting Treatment
The Objectivity Concept does not prescribe a specific debit/credit rule for a single transaction. Instead, it governs how you decide which account to debit and which to credit. For every entry you make, you must ask: "What is the objective document that supports this?"
- For a credit purchase of goods: The invoice is the voucher. The journal entry is:
Date Particulars L.F. Debit (₹) Credit (₹) Purchases A/c Dr. 10,000 To Supplier's A/c 10,000 (Being goods purchased on credit as per invoice no. ...)