Which generally accepted accounting principle (GAAP) requires that accounting is based on objective evidence?
Answer a. the recognition principle b. the impartiality principle c. the objectivity principle d. the conservatism principle
The correct answer and explanation is:
Correct Answer: c. the objectivity principle
Explanation:
The objectivity principle is a fundamental concept in generally accepted accounting principles (GAAP) that requires all financial information reported by a business to be based on objective and verifiable evidence. This means that accounting entries should be supported by unbiased documentation such as invoices, receipts, contracts, bank statements, and other reliable sources. The principle ensures that the financial data presented in reports is free from personal opinions, assumptions, or biases.
This principle is important because it helps build trust among stakeholders, including investors, regulators, and management. When financial reports are supported by concrete evidence, users of those reports can be confident that the numbers reflect actual business transactions rather than estimates or manipulated data.
For example, if a company records a sale, the objectivity principle requires that the transaction is backed by a valid sales invoice or contract. Similarly, when valuing an asset, it must be recorded at its actual cost as shown by a receipt or purchase agreement, rather than an estimate of its market value unless specific GAAP rules allow fair value estimation.
This principle enhances the credibility and reliability of financial statements. It also helps accountants remain ethical and consistent in their work, as it discourages making entries based on speculation or undue influence.
In contrast, the recognition principle refers to the timing of when transactions should be recorded. The conservatism principle involves being cautious in reporting income and assets. The impartiality principle is not a recognized term in GAAP. Therefore, among the choices given, only the objectivity principle directly addresses the need for accounting to be based on objective evidence.