Implications of Going concern concept and assumptions

The going concern concept is an accounting concept with impact on every business. It is this concept that helps accountants and auditors assume that a business will continue operations as long as possible. This article explains this concept and its implications in preparing financial statements.

1. What's Going concern concept

Going concern concept is the assumption that a business will continue operations for a foreseeable future period and it is not expected to liquidate the next accounting period, that is, in a year. The principle assumes that an entity will remain in business indefinitely. As a result, financial reports are prepared based on this principle.

When financial statements are prepared with the assumption that it will liquidate, then, the break up value or market value are used. This implies that the assets are sold out. However, with going concern assumptions, entities prepare accounting reports on a cost basis. More so, for assets they are deprecated with the belief that the assets will be used over a long period of time.

2. Implications of Going Concern

2.1 Fixed Assets

Fixed Assets costs are spread over its useful life using depreciation. This is made possible by the above assumption. However, if it is assumed that the business will liquidate, the sell value is used in the report.

2.2 Financial reports

With the going concern concept, financial statements are prepared with the assumption that the entity will continue for a long time. However, if there is any event that may affect its existence, this is disclosed in the report. More so, when a business must liquidate for the period a statement of affairs is prepared rather than a statement of financial position.

2.3 Profit or loss

Where the accountant does not need to view an entity as a going concern, there is no need to know its performance. However, for continuous firms, the profit or loss must be ascertained to decide whether the overall objective is attained.

3. Conclusion

To conclude, going concern assumptions is applied in the area of financial reports preparations. When it is certain that an event will occur within the next financial period and it may impact on the firm's continuous existence this is reported.