What is going concern concept in Accounting

ACCOUNTING

A going concern concept in Accounting-By this post, we shall study in detail the important going concern concept out of 12 various accounting concepts on which accounting is based. If you have a business then you should know about these important going concern concepts.

What is the meaning of going concern concept?

The going concern concept is an important concept of accounting and as per the going concern concept, It is the assumption that an organization/ enterprise is a going concern and will continue in operation for the predictable future. It assumes that the business can generate income, meet its obligations, and doesn’t plan or won’t need to liquidate in the coming year.

How can you explain the going concern concept?

The financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used needs to be disclosed.

The valuation of assets of a business entity is dependent on this assumption. Traditionally, accountants follow historical costs in the majority of cases.

Example of Going Concern Concept

For example, Suppose Mr. M purchased a machine for his business paying 10,00,000₹ out of 14,00,000₹ invested by him. He also paid transportation expenses and installation charges amounting to 140,000₹. If he is still willing to continue the business, his financial position will be as follows:

LiabilityAmountAssetsAmount
Capital14,00,000₹Machinery11,40,000₹
Cash 2,60,000₹
Total14,00,000₹Total14,00,000₹

Now if he decides to back out and desires to sell the machine, it may fetch more than or less than 11,40,000₹. So his financial position should be different. If the going concern concept is taken, an increase/ decrease in the value of assets in the short run is ignored. The concept indicates that assets are kept for generating benefit in the future, not for immediate sale; the current change in the asset value is not realizable and so it should not be counted.

How the going concern concept is important?

Read the point given below to know the importance of going concern concept-

  1. It is because of this assumption that we classify the assets and the liabilities as long term or short term.
  2. The going concern principle provides the sound basis for the measurement of income or profit. Thus the product that can be used in the business for more than a year or have future economic benefits is recognized as a fixed asset and not an expense.
  3. This assumption of going concern accounting principle help the investors by assuring them that the enterprise will keep working like it is expected to perform its business operations
  4. It directs us to report the assets and the liabilities in the financial statements at the cost not at the market price because the intention of the entity is not to sell the asset but to use it in the furtherance of the business.
  5. keeping in mind its pre-determined goals.
  6. In the ordinary course of business, enterprise values its entire current asset at the cost or the net realizable value, whichever is lower;

How does the going concern concepts work?

The going concern concept of accounting is the assumption for accounting that-

  1. An enterprise will work continuesily for long term basis.
  2. A going concern will be valued according to operational efficiency, market share, the ability to influence the market, technology advantages, and so on.
  3. It may be valued using the discounted cash flow method, with the assumption of future profitability.
  4. This assumption of going concern accounting principle help the investors by assuring them that the enterprise will keep working like it is expected to perform its business operations

Further Faqs related to going concern concepts

  1. What do you mean by going concern concept in accounting?

    The going concern principle assumes that any organization will continue to operate its business for the foreseeable future. The principle purports that every decision in a company is taken with the objective in mind of running the business rather than that of liquidating it.

  2. What is the main assumption of the going concern concept?

    The going concern assumption is that a business will remain active for the foreseeable future.

  3. What would be the effects if a business does not follow the concept of going concern?

    Without going concern concept, businesses would not be able to perform accrued or prepaid expenses. The going concern concept allows a business to defer some of their prepaid expenses to future accounting periods, rather than recognizing them all at once.

  4. Why Is the going concern concept important in accounting?

    A company prepares financial statements on a going concern basis, under the assumption that they can continue operations for the foreseeable future. It is assumed that the company does not have the intention, or need, to liquidate its assets.

  5. Is going concern concept a good thing?

    A going concern concept is considered good for the time being. It means your business is facing financial distress but is still able to make payments to keep it operating.

  6. Why do we have to consider going concern assumption in our audit?

    Going Concern concept establishes the relevant requirements and guidance with regard to the auditor’s consideration of the appropriateness of management’s use of the going concern assumption and auditor reporting.

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