Going concern concept is an fundamental accounting assumption that an enterprise is a going concern & will continue its operation in future.
What is going concern concept in accounting?
Going concern concept is one of the basic accounting assumption that is followed by every enterprise.
Further, there are three fundamental accounting assumption that must be followed by an enterprise are as follows:
1. Going Concern
2. Consistency
3. Accrual
If nothing is written about the fundamental accounting assumption in the financial statement. Then it is assumed that it has been followed in preparation of financial statement.
However, if any of the above mentioned accounting assumption is not followed then that facts should be specifically disclosed.
The financial statement normally prepared on assumption that an enterprise is going concern and will continue its operation for foreseeable future . Hence , it is assumed that enterprise has neither intention nor 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 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, accountant follows cost in majority of the cases.
In brief, the going concern assumption is the concept that an entity will remain in business for foreseeable future and continue to operate indefinitely. Unless and otherwise there is a significant evidence over the continuity of the business.
If there is an evidence that entity may not be a going concern , then entity’s assets needs to be assessed for impairment, & there may be possible written downs. In such case the ,this needs to be disclosed in company’s financial statements.
Example
Mr. A 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 Rs. 70,000. If he is still willing to continue the business ,his financial position will be as follows:
Balance sheet
| Liability | (Rs.) | Assets | (Rs.) |
| Capital | 7,00,000 | Machinery Cash | 5,70,000 1,30,000 |
| 7,00,000 | 7,00,000 |
Now, if he decides to back out and desire to sell the machine, it may fetch more than or less than Rs. 5,70,00. So his financial position should be different. If going concern is taken , increase/decrease in the value of assets in the short-run is ignored. The concept indicates that assets are kept for generating benefit in future , not for immediate sale ; current change in the asset value is not realizable and so it should not be counted.
