Going Concern

Meaning of Going Concern

Any analyst analyzing a company will be left to a basic assumption that the company does not go bankrupt, or file a chapter 11 bankruptcy and this basic assumption that allows the analyst to think that there is no immediate danger to the company and the company can operate till infinity is called as the principle of going concern.

Explained

The going concern is one the accounting assumptions wherein the financial statements of the companies are prepared on the basis that the company will continue its working in an anticipated future and has no intention or need to close materially its operations.

On the other side, if there is any intention of the company to close its operation, then that the financial statements of the companyFinancial Statements Of The CompanyFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more will be prepared on a different basis, which the company has to disclose. Otherwise, it is always assumed that the realization of the assets and the settlement of the liabilities are done in the ordinary course of business. It is because of the going concern assumption that an enterprise prepays their expenses before they accrue as they were intent that the company would survive in the future.

Please note that there are three accounting assumptionsAccounting AssumptionsAccounting assumptions are a set of rules that ensures an organization's business operations are conducted efficiently and as per the standards defined by the FASB (Financial Accounting Standards Board), which ultimately helps lay the groundwork for consistent, reliable and valuable information.read more in accounting – going concerned, Consistency, and Accrual assumptionAccrual AssumptionAccrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made. read more.

Going-Concern

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Source: Going Concern (wallstreetmojo.com)

Going Concern Assumption Example

Suppose Mr. A purchased a Plant & Equipment in his business paying $400,000 out of $500,000 invested by him. He also paid installation expenses amounting to $2,000. If he is still willing to continue his business, his financial position will be as follows:

going 1

Now, if Mr. A decides to sell plant and equipment, then he might get more than $402,000 or less, so it will change his financial position. However, if the concept of going concernConcept Of Going ConcernGoing Concern concept is an accounting principle which states that the accounting statements are formulated with a belief that the business will not be bankrupt or liquidated for the foreseeable future, which generally is for a period of 12 months.read more is considered, then such a change in asset value will be ignored in the short run. So this indicates that the intention of keeping assets is to generate benefits/ profits in the future and not for selling it in between. The change in value, which is prevailing at the time off is not realizable, so the same should not be considered by the company.

As per the analysis of the different companies, it is seen that despite many business failures, the enterprises have a relatively high rate of continuance, and there exist entities that have the existence of more than a century even though there is a change of the ownership. Therefore in the majority of the cases, business entities are going concern in accounting, which has proved that it is useful to adopt the assumption of continuity for accounting purposes.

The management of the company decides whether they are satisfied by following the going concern assumption or not. If the management thinks that for their business, this assumption is not appropriate, then the management can prepare the financial statements using the breakup basis. In a breakup basis, the assets are reported at likely to be realized amount, from the sale and liabilities at the amount on which they expect to settle.

We can take the example of a venture established for a particular purpose, like for setting up a shop temporarily for some seasonal work. E.g., selling candles and decorative items around Christmas, where the business comes to an end as soon as the purpose solves. Here, in this case, this assumption cannot be followed as the owner already knows that the duration of business is only a month or two.

Advantages

Drawbacks

Possible Indications of Going Concern Problems

Conclusion

Professionals agree that evaluation and disclosure of going concern in accounting provide a critical improvement in the financial statements of the company. It provides for the accurate and complete picture of the financial health of the company to the users of the financial statement. If there is proper disclosure, then the financial statement of the company will be more comparable, which will provide more confidence to the investors that risk in the company is adequately addressed.

This article has been a guide to what is Going Concern? Here we discuss what is Going Concern Principles, including examples, advantages and drawbacks, and problems. You can learn more about from the following articles –

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