What is the concept assumes that the business has an indefinite economic life?

The going concern principle is the assumption that a business will continue to exist in the near future, in other words, that it will not liquidate or be forced out of business.

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As an accounting principle, the going concern principle serves as a guideline which allows readers of a business’s financial statements to assume that the business will continue to operate long enough to carry out its current obligations, objectives and commitments.

The importance of the going concern principle

Going concern is an important part of the generally accepted accounting principles. Without it, businesses would not be able to perform accrued or prepaid expenses.The going concern principle allows a business to defer some of their prepaid expenses to future accounting periods, rather than recognising them all at once.

Think about this: If we assume that a business will not be able to operate in the foreseeable future then why would we prepay or accrue anything? Well, if we assume the business might not operate long enough to realize these future expenses, then we would not prepay or accrue anything.

Going concern and cost principle

The going concern principle provides some justification for accountants to follow the cost principle.

If a company is a going concern, it has no intention to liquidate, so why should it report the current value of its long term assets? Yet, if the value of an asset has been damaged or weakened, then the carrying amount of the asset could be reduced to an amount lower than its carrying value.

An example showing the application of the going concern principle is the calculation of depreciation of assets. This depreciation calculation is based on the expected economic life of the asset, as opposed to its current market value.

Businesses assume that they will continue operating for an indefinite period of time, and that their assets will therefore be used in the business until they have fully depreciated.

The significance of accounting principles

Accounting principles serve a significant purpose of standardising the way in which businesses perform their financial reporting activities.

It is important for all businesses to keep track of their financial statements, and ensure that they are correctly and efficiently drawn up. With Debitoor invoicing software you can instantly extract and download your financial statements at any point in time!

Hamidah Cashmeres returned scarves worth S1000 that were purchased on credit from Yuki Silk Manufacturing. Identify the source document Hamidah Cashmeres would receive from Yuki Silk Manufacturing and the journal Hamidah Cashmeres should record the transcations in
Credit note; Purchase Returns Journal
Credit note; Sales Returns Journal
Debit note; Purchase Returns Journal
Debit note; Sales Returns Journal

Going concern is an accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary. This term also refers to a company's ability to make enough money to stay afloat or to avoid bankruptcy. If a business is not a going concern, it means it's gone bankrupt and its assets were liquidated. As an example, many dot-coms are no longer going concern companies after the tech bust in the late 1990s.

Key Takeaways

• Going concern is an accounting term for a company that is financially stable enough to meet its obligations and continue its business for the foreseeable future.
• Certain expenses and assets may be deferred in financial reports if a company is assumed to be a going concern.
• If a company is no longer a going concern, it must start reporting certain information on its financial statements.
• Negative trends that lead to no longer being a going concern include denial of credit, continued losses, and lawsuits.

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Going Concern

Understanding Going Concern

Accountants use going concern principles to decide what types of reporting should appear on financial statements. Companies that are a going concern may defer reporting long-term assets at current value or liquidating value, but rather at cost. A company remains a going concern when the sale of assets does not impair its ability to continue operation, such as the closure of a small branch office that reassigns the employees to other departments within the company.

Accountants who view a company as a going concern generally believe a firm uses its assets wisely and does not have to liquidate anything. Accountants may also employ going concern principles to determine how a company should proceed with any sales of assets, reduction of expenses, or shifts to other products.

Going concern is not included in the generally accepted accounting principles (GAAP) but is included in the generally accepted auditing standards (GAAS).

Red Flags Indicating a Business Is Not a Going Concern

Certain red flags may appear on financial statements of publicly traded companies that may indicate a business will not be a going concern in the future. Listing of long-term assets normally does not appear in a company's quarterly statements or as a line item on balance sheets. Listing the value of long-term assets may indicate a company plans to sell these assets.

A firm's inability to meet its obligations without substantial restructuring or selling of assets may also indicate it is not a going concern. If a company acquires assets during a time of restructuring, it may plan to resell them later.

Going Concern Conditions

Accounting standards try to determine what a company should disclose on its financial statements if there are doubts about its ability to continue as a going concern. In May 2014, the Financial Accounting Standards Board determined financial statements should reveal the conditions that support an entity's substantial doubt that it can continue as a going concern. Statements should also show management's interpretation of the conditions and management's future plans.

In general, an auditor examines a company's financial statements to see if it can continue as a going concern for one year following the time of an audit. Conditions that lead to substantial doubt about a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, lawsuits against a company, and denial of credit by suppliers.

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