The going concern notion, sometimes known as the going concern assumption, asserts that enterprises should be managed as though they will continue to exist indefinitely, or at least long enough to achieve their goals. To put it another way, the going concern notion believes that enterprises will last a long time and will not close or be sold anytime soon. A going concern is a business that is likely to survive. A going concern is a company that is projected to close soon.
In generally accepted accounting standards, the concept of a going concern is critical. Companies wouldn't be able to prepay or accumulate expenses if the going concern assumption wasn't made. Why would small business accountants prepay or accrue anything if we didn't expect business to continue to operate? It's possible that the company won't last long enough to recoup its costs.
In terms of assets, the going concern makes one of the most significant contributions to GAAP. The entire concept of depreciation and amortisation is predicated on the assumption that firms would continue to function indefinitely. Because of the going concern assumption, assets are also reported on the balance sheet at historic costs. A liquidation approach to asset valuation might be more suitable if we discard the going concern and assume the company would close within the next year. Assets would be recorded at their net realisable values, and rather than being divided into current and long-term categories, all assets would be treated as current assets.
However, some businesses close and go out of business. If accountants in London tell that company's financial situation shows that the going concern assumption can't be followed (the company could go bankrupt), a disclosure about the going concern should be included in the financial statements.
Aspects of Auditing
The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern” and the Proposed Statement of Financial Accounting Standards to be inserted as a new Subtopic 30 in Topic 205, "Presentation of Financial Statements" of the Codification deal extensively with the concept of a going concern.
“General purpose financial statements are prepared on a continuing concern basis, unless management intends to liquidate the firm or discontinue operations, or has no practical alternative but to do so,” according to the SFAS.
For the audit of financial statements based on the going concern assumption, the following points should be taken into account:
- In the absence of significant information to the contrary, the continuation of an entity as a going concern is assumed in financial reporting.
- Assets and liabilities are recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business when the going concern assumption is appropriate.
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