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Registered Company ISO 9001-2015

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The going concern concept is one of the accounting principles that presume an entity going concern is to be a going concern, that is, it will operate for a considerable time in the foreseeable future. This assumption holds that the company will not be forced to sell its assets or cease operations because of financial pressures or some other such problem. Instead, it is conjectured that the company will continue to earn income while honoring its obligations in the normal course of business-that is, managing its assets and liabilities. In financial reporting, the going concern assumption is embedded in frameworks like the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).

5 Accounting period Concept

Along these lines, the value of a company that is thought to be a going concern is higher than its breakup value since a going concern can possibly keep on earning profits. Hence, income is not the same as cash collections and expense is different from cash payments. Under Catch Up Bookkeeping accrual basis, revenues and expenses are recognized when they occur regardless of when the amounts are received or paid.

Business entity

It is because the information mentioned in the financial statements is used by different internal and external users, like investors, banks, creditors, management, employees, financial institutions, etc., for making financial decisions. Hence, the concept says that all relevant and material facts or figures about an organisation must be disclosed in its financial statements. To fully ensure this concept, an organization has to prepare its Balance Sheet and Profit & Loss Account based on the format provided by the Indian Companies Act 1956. Besides, different regulatory bodies, like SEBI, also make it compulsory for companies to completely disclose the true and fair picture of their state of affairs and profitability. Going concern concept is one of the accounting principles that states that a business entity will continue running its operations in the foreseeable future and will not be liquidated or forced to discontinue operations for any reason. One major disadvantage of the going concern concept is that it assumes continuity of existence indefinitely.

• With this assumption, an accountant can defer the recognition of specific expenses until a later accounting period, when the company will probably still be operating and utilizing its assets in the most efficient way possible.
• The accrual period allows the supplier to note the income from delivering goods at the time those goods were delivered and not the time when those goods were paid for.
• The concept is not clearly defined anywhere in the Generally Accepted Accounting Principles (GAAP), which leaves a considerable amount of interpretation regarding when an entity should report it.
• Hence, a declaration of going concern means that the business has neither the intention nor the need to liquidate or to materially curtail the scale of its operations.
• If it’s determined that the business is stable, financial statements are prepared using the going concern basis of accounting.

Assessing Going Concern Assumption

Besides, it warns the companies about the penalties if there is any sort of misinterpretation in the financial statements. The conservatism or prudence concept believes in playing safely, while recording the transactions in the book of accounts. According to this concept, an organization should adopt a conscious approach and should not record its profits until they are realised. However, it states that the organization should realise any loss even if the company has not incurred it yet, or if there is a slight possibility of loss to occurring in the future. No matter how pessimist attitude this concept shows, it is essential for an organization to deal with uncertainty and allows them to protect the interest of creditors against any unwanted distribution of its assets. For example, if an organization feels that a certain debtor will not pay the amount in the future, it should open a Provision for Doubtful Debts Account.

• An investor would want to know that the business he is venturing into would still be operational and would provide him a return for his investment.
• Using this logical approach, it should be possible to identify which accounts will be affected and then consider how they will be affected.
• The going concern assumption is that a business will remain active for the foreseeable future.
• If we disregard the going concern and assume the business could be closed within the next year, a liquidation approach to valuing assets would be more appropriate.
• Theory Base of Accounting consists of accounting concepts, principles, rules, guidelines, and standards that help an individual understand the basics of accounting.

Management’s responsibility

• Instead of assuming that the business will keep operating, the financial statements will need to reflect the value of the business’s assets if they were sold off, which is called their liquidation value.
• They evaluate whether management’s use of the going concern assumption is appropriate, analyzing cash flow forecasts, loan agreements, and operational plans.
• When financial statements are prepared using the going concern assumption, it is presumed that the company will continue its operations in the foreseeable future, usually at least 12 months from the reporting date.
• Together, this gives companies higher possibilities in raising capital and expanding their entity.

An example of such contrary information is an entity’s inability to meet its obligations as they come due without substantial asset sales or debt restructurings. If such were not the case, an entity would essentially be acquiring assets with the intention of closing its operations and reselling the assets to another party. Accounting standards determine what a company must disclose on its financial statements if there are doubts about its ability to continue as a going concern. With this assumption, an accountant can defer the recognition of specific expenses until a later accounting period, when the company will probably still be operating and utilizing its assets in the most efficient way possible. The revenue recognition concept, also known as the realisation concept, as the name suggests, defines that an organization should record its revenue from business only when it is realised, not when the firm has received the cash. The company will not realise the amount of revenue until its work on the product is complete.

Companies assume that their business will continue for an indefinite period of time and that the assets will be used in business until they are fully depreciated. Another example of this concept is the prepayment and accrual of various business expenses. Companies can prepay and accrue fixed assets expenses only when they and their trade partners believe that they will not shut down operations in the foreseeable future. The going concern idea is not plainly characterized anywhere in generally accepted accounting principles, and so has a wide amount of interpretations in regards to when a company should report it. Generally accepted auditing standards (GAAS), however, do have instructions for an auditor in regard to a company’s ability to function as a going concern. As the name suggests, the full disclosure concept states that an organization should disclose all the facts regarding its financial performance.