Going Concern

Going Concern 

Business Entities and Business Enterprises will continue to grow, strive, exist and operate fully in the future. Business and Entrepreneurship are something that will never cease to exist. 

Where there is business, there is a profit and a loss. One of the fundamental assumptions in the field of Accounting based on the given financial statements is prepared in the Going Concern Concept. It is also assumed that the business entity has neither any intentions nor the need to liquidate the scale of its operations.

Assuming that a Business Enterprise will continue to exist operationally for the near future, then the company must prepare financial statements on a going concern concept basis.

What is Going Concern Concept

The finance-based or related statements of a Business Enterprise or Corporation is generally prepared on the assumption that a company is a going concern and will continue in operation for the upcoming future. Hence, it is assumed that the enterprise has neither the intentions to liquidate nor reduce the scale of its operations.

The Going Concern Concept assumes that the enterprise will continue to operate in the foreseeable future. It also implies that the capital assets are recorded at cost value instead of a liquidation value, which is an accounting technique used to lower the loan value periodically. The items are also labelled as current and non-current in this concept of Going Concern.

Explain Going Concern Concept

To explain Going Concern Concept, we can say that the assumption persists in all ordinary situations-

• This notion implies that a company’s existing resources will be used to fulfil the company’s business needs rather than be sold
• When a business ceases to be a going concern, it is required to begin disclosing certain information on its financial statements 
• Denial of credit, continuous losses, and lawsuits are all signs that your business is no longer viable

Suppose the continuity of an entity is in doubt. In that case, a liquidation approach to the specific company’s balance sheet is taken. The assets and liabilities are then valued as if the company or body was to be liquidated in the near future.

This Going Concern Concept-

Indications of Problems related to Going Concern Concept

1. The bankruptcy of any of the major customers of the company or enterprise.
2. A significant loss in the trading is being incurred for a couple of years. 
3. A company must surely gain profits in abundance to help the company survive over a long period.
4. A high risk related to financing arises due to a delay in the payments of interests, loans, and debt principles.
5. The company’s liquidity position slowly starts to deteriorate as the company fails to keep a backed-up financial arrangement or aid.

Importance of Going Concern Concept

The importance of the Going Concern Concept in the Business World is-

• To uphold the integrity of the financial market, financial statements must be prepared to be reflected the most accurate value of firms/companies and their assets
• People make use of financial statements
• The company has to ensure that the financial information and data are put forward and analysed in a fair and useful way

Examples of the “Going Concern” Concept-based companies and enterprises-

General Motors

It went into bankruptcy in early 2000. After which, the federal government stepped into the scenario and helped General Motors by giving them a bailout and a guarantee. Thus, General Motors is considered a Going Concern Concept-based Enterprise/company.

Conclusion

Going Concern is a principle that states the assumption that a specific or every business will continue to work for the upcoming future. Going Concern Concept is used by accountants when preparing financial reports and statements of the business company/enterprise. If the continuity/future of a company is in doubt, then a liquidation approach to the balance sheet of the specific company is taken; the assets and liabilities are then valued as if the company or body was to be liquidated in the near future.

Auditors will issue a certificate by analysing and examining the company’s financial statements to know about the operating condition of the company to continue in the long term. If a firm is performing poorly in the market, it is not certain whether it will close down in the near future. In such a time, the Going Concern Concept should be applied.