Going concern concept

Definition and explanation

The going concern concept of accounting implies that the business entity will continue its operations in the future and will not liquidate or be forced to discontinue operations due to any reason. A company is a going concern if no evidence is available to believe that it will or will have to cease its operations in foreseeable future.

An example of the application of going concern concept of accounting is the computation of depreciation on the basis of expected economic life of fixed assets rather than their current market value. Companies assume that their business will continue for an indefinite period of time and the assets will be used in the business until fully depreciated. Another example of the going concern assumption is the prepayment and accrual of expenses. Companies prepay and accrue expenses because they believe that they will continue operations in future.

The going concern concept is applicable to the company’s business as a whole. If, for example, a company closes a small business segment or discontinues one of its product and continues with others, it does not mean that the company is no longer a going concern because the going concern concept is applicable to the entity as a whole not to the particular segment of business or product.

The going concern concept of accounting is of great importance for accountants because if a company is a going concern, it must prepare its financial statements in accordance with applicable financial reporting framework such as generally accepted accounting principals applicable in United States of America (US-GAAP) and international financial reporting standards (IFRS).

The auditors conduct their own evaluation to see weather the going concern assumption is appropriate or not at the time of auditing financial statements even if the company claims to be a going concern.

A D V E R T I S E M E N T

Examples

(1). A company manufactures a chemical known as Chemical-X. Suddenly, the government imposes a restriction on the manufacture, import, export, marketing and sale of this chemical in the country. If Chemical-X is the only product that company manufactures, the company will no longer be a going concern.

(2). The National company is in serious financial trouble and cannot pay its obligations. The government gives National company a bailout and a guarantee of all payments to creditors. The national company is a going concern despite of its current weak financial position.

(3). The Eastern company closes one of its branch and will continue with others. The company is a going concern because the shutting down a small part of business does not impair the ability of the company to operate as going concern.

(4). The Small company is unable to make payments to its creditors due to a very weak liquidity position. The court grants the order of liquidating the company upon the request of one of the company’s creditors. The company is no longer a going concern because sufficient evidence is available to believe that the company cannot continue its operations in future.

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42 Comments on Going concern concept

  1. priti das

    This helped me in my exam.

    1. Jack line wafula

      Thanks

    2. Jxvx9

      Thank you ๐Ÿ™‚ examples clear all my doubts

  2. owen harry

    this was helpful
    thumbs up

  3. Shah Nikhil

    very helpfull

  4. Ayesha

    Examples are very helpful.

    1. Accounting For Management

      Thanks

  5. Pooja

    So much thanks for information…it really helps.

    1. Accounting For Management

      Thanks for using Accounting for Management.

      1. Thank you, it really helps

        Thank you, it has enabled me have better understanding

  6. Leah

    Thanks the information is really helpful

  7. Oje-A-myne-cares

    Life is also a going concern!

  8. Rhys Nana

    Another name for Going concern assumption is…??

    1. Juls

      Breathe
      ๐Ÿ˜‚๐Ÿ˜‚๐Ÿ˜‚
      As long as you’ve not stopped breathing, life is still a going concern.

  9. Mia

    Thanks. I fully understand it now. ๐Ÿ˜Š

  10. Paige

    Very very helpful!! Thanks a lot!

  11. Lambert

    So going concern is the same as underlying concept

    1. Juls

      Haven’t heard of underlying concept.
      Explain please…………..

      1. Paul Michael Sesay

        Can you please help me with an example of published account showing the effect on the account if the going concept is not applied

  12. Jacob Muli

    Great examples

  13. htet wai

    Thanks for your support of going concern explanations due to share of my friends and others.

  14. Mahendara desai M

    Very nice explanation

  15. Mahendara desai M

    Most imp

  16. david

    wooooooooooooooooooooooooooooow it is so good, so thank you so much

  17. Okta

    it’s really helpful. thank you so much!

  18. Mathias

    I love this it of much help

  19. Mohammad Asim

    Amazing! It worth of my interview question.

  20. Lisbeth Zivanai

    Very helpful thank you

  21. Gulab Singh

    Thank you so much

    1. Accounting For Management

      You are welcome Paa G ๐Ÿ™‚

  22. Nigel

    Understood
    Thanks a lot

  23. MATAKA ASHEL

    Thanks,,,nice explanation and good examples of a going concern concept

  24. satya prakash

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    1. Mahameds Samadoone

      Thank u very much. It is a very clear eample.

  25. Japhet

    This was very helpfull to my experience

  26. Kyateesa John

    Very nice thanks indeed

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