Going Concern: Key Accounting Principle Explained

A going concern is an accounting term that assumes a company will continue to operate and meet its financial obligations for the foreseeable future, typically at least 12 months. This principle is fundamental in financial accounting and significantly impacts the preparation of financial statements, the valuation of assets, and the audit process.

Key Points:

• Assumption: The going concern assumption presumes that a business will remain operational and not liquidate its assets or cease business activities in the near future. 123
• Impact on Financial Statements: This assumption affects how assets and liabilities are reported. Assets are valued at their historical cost and depreciated over their useful life, rather than at their liquidation value. 46
• Auditor's Role: Auditors assess a company's ability to continue as a going concern by examining financial statements and looking for indicators such as loan defaults, lawsuits, and negative trends in operating results. If there is substantial doubt about a company's ability to continue, the auditor must disclose this in the financial statements. 56
• Disclosure Requirements: Companies must disclose any substantial doubt about their ability to continue as a going concern, along with management's plans to mitigate these risks. 57
• Valuation: The going concern value is higher than the liquidation value because it reflects the company's potential to earn future profits. This is crucial for stakeholders making investment decisions. 47