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\n1. The Going Concern Principle <\/a>
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\n2. Accounting Implications of the Continuity Assumption <\/a>
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\n3. Understanding of going concern principle <\/a>
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\n4. Example of going concern <\/a>
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\n5. Signs of Potential Going Concern Issues <\/a>
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\n6. Conclusion <\/a>
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\n7. FAQs <\/a>
\n<\/small><\/li>\n<\/ul>\nThe Going Concern Principle<\/h2>\n
The going concern concept is a fundamental principle in accounting, which presupposes that an entity will continue to operate for the foreseeable future, and its assets will be held for use in generating revenue, rather than for disposal. As a result, fixed assets, being an integral part of the production process in a manufacturing unit, are not reflected in their current resale value.<\/p>\n
However, in the event of an entity’s imminent liquidation with compelling evidence to support such an outcome, the assets should be recognized at their liquidation value, and the liabilities should be recorded at the amount required for immediate settlement. This approach ensures that the financial statements accurately reflect the entity’s financial position and aids stakeholders in making informed decisions regarding the entity’s future.<\/p>\n
Accounting Implications of the Continuity Assumption<\/h2>\n
As per the continuity assumption, certain accounting implications arise, namely:<\/p>\n
The demarcation between capital expenditures and revenue expenditures.<\/p>\n
The categorization of assets as current or non-current, and liabilities as current or non-current.<\/p>\n
The procurement of fixed assets is for operational use, and not intended for sale in the regular course of business.<\/p>\n
The systematic allocation of depreciable assets’ cost over their useful lives.<\/p>\n
Fixed assets’ liquidation value is not depicted in the Balance Sheet.<\/p>\n
Understanding of going concern principle<\/h2>\n
In accordance with the going concern principle, accounting professionals exercise their judgment to determine the appropriate financial reporting to be presented in financial statements. In the case of businesses that are still operating, long-term assets may be recorded at their cost rather than at current or liquidation value. However, if the sale of assets does not impede a company’s ability to conduct business, such as in the case of closing a small branch office and relocating the staff to other business divisions, the business is still deemed to be a going concern.<\/p>\n
Accountants who apply the going concern principle generally believe that the business utilizes its assets prudently and has no immediate need to liquidate them. Based on this principle, accountants can advise businesses on asset sales, cost-cutting measures, or transitioning to different products.<\/p>\n
It should be noted that while the going concern principle is covered in generally accepted auditing standards (GAAS), it is not part of generally accepted accounting principles (GAAP).<\/p>\n\t\t
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