Going Concern Concept – definition, explanation and examples
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 is disclosed.
Continuation of an entity as a going concern is presumed as the basis for financial reporting unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting.Wikipedia
Going Concern Concept
Going Concern concept in Detailed : 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 is disclosed.
The valuation of assets of a business entity is dependent on this assumption. Traditionally, accountants follow historical cost in majority of the cases.
Suppose Mr. X purchased a machine for his business paying Rs. 5,00,000 out of Rs. 7,00,000 invested by him. He also paid transportation expenses and installation charges amounting to Rs. 70,000. If he is still willing to continue the business, his Financial position will be as follows:
Now if he decides to back out and desires to sell the machine, it may fetch more than or less than Rs. 5,70,000. So his Financial position should be different. If going concern concept is taken, increase/ decrease in the value of assets in the short-run is ignored. The concept indicates that assets are kept for generating bene t in future, not for immediate sale; current change in the asset value is not realisable and so it should not be counted.
Going Concern Concept: Business transactions are recorded on the assumption that the business will continue for a long-time. There is neither the intention nor the necessity to liquidate the particular business venture in the foreseeable future. Therefore, it would be able to meet its contractual obligations and use its resources according to the plans and pre-determined goals. It is on this concept that a clear distinction is made between assets and expenses. Transactions are recorded in such a manner that the benefits likely to accrue in future from money spent now or the future consequences of the events occurring now are also taken into consideration. It is because of this concept that fixed assets are valued on the basis of cost less proper depreciation keeping in mind their expected useful life ignoring fluctuations in the prices of these assets.
However, if it is certain that a business will continue for a limited period, then the accounting records will be kept on the basis of expected life of the business and there will be no need for such detailed accounting information as to revenue and capital expenditure.
When an enterprise liquidates a branch or one segment of its operations, the ability of the enterprise to continue as a going concern is not impaired. But the enterprise will not be considered as a going concern if it goes into liquidation or it has become insolvent. If the assumption of the going concern is not valid, the financial statements should clearly state this fact.