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What is the Going Concern Concept and why is it important in Accounting?

A foundational idea in accounting is the going concern concept. It assumes that a firm will carry out its present goals, utilize its current assets, and continue to pay its debts over the upcoming financial period and beyond. In other words, it is the premise that the firm will continue to operate and that the value of its assets will be steady. The continuous worry notion is another name for this fundamental idea.

When a firm fails, its assets frequently lose the value they had on the balance sheet. This occurs because some company-specific assets, including specialized software, may be less valuable when sold to outside parties than what was paid for them. Additionally, if a business must sell its assets quickly, it might not have the time to wait for the best possible price. An accountant is required to disclose in their audit report if they have any grounds to believe that a company won’t be able to pay its commitments, operate as a going concern, and safeguard its assets.

Accountants use the going concern concept when creating financial statements, which provide information about a company’s financial health.

Why is Going Concern principle important?

  • It offers consistency and predictability in financial reporting, which aids creditors and investors in making wise choices about whether to lend money to a company.

  • It makes sure that balance sheets accurately and honestly reflect a company’s financial situation.

  • Suppose it becomes clear, for any reason, that a business is no longer a going concern. The accountant must take the necessary actions to include this in the financial statements. This might entail writing down fixed assets or documenting impairment losses.

  • It enables firms to carry on with regular operations even while they are having financial challenges. To give firms the chance to recover and become profitable again, this is vital.

Without going concern rule, companies would be obliged to cease operations and sell up their assets as soon as they ran into financial trouble. Economic instability and mass unemployment are expected to result from this.

Disclosure of Going Concern in the Financial Statements

Indicate the main circumstances and events that initially gave rise to the belief that there was substantial doubt about the entity’s ability to continue as a going concern for a reasonable period if substantial doubt is subsequently eliminated, primarily because of taking management’s plan into account.