Going Concern Concept

GOING CONCERN

Concept

The 3rd Accounting Concept

Meaning

Of Going Concern Concept

What is Going Concern Concept

• Going concern concept is one of the accounting principles that states that “a business entity will continue running its operations in the foreseeable future and will not be liquidated or forced to discontinue operations for any reason”.

In orther words,

A business has the ability to pay off the debt during the accounting period.

There should be no changes in the law governing the business.

a going concern is expected to have the following things working in their favour:

The business is capable of running the daily operations and has capital and raw materials to do so.

There should be demand in the market for the products or services offered by the company.

Importance of Going Concern

The concept is important for the following factores and reasons:

• Shows the stability of the business carried on by the company
• Helps shareholders assess the financial stability of the company
• Helps business fetch loans or make investments on a long term basis
• It gives comfort to creditors to do business with the company.

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Disadvantages

Advantages

In case there are chances that the business may wind up because of the non-demand of the product in the market or any other factor in such a case the financial statements that are prepared on going concern cases may depict the wrong information. Any change in government policy or laws & regulations may impact the concept of going concerned of the business and at that times the financial statements prepared following the concept of going concerned are needed to be changed.

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Disadvantages

The going concern concept provides the basis for recording fixed assets that will give the economic benefits for many years. So these are recorded in the balance sheet at cost and not treated as an expense in the income statement. It develops faith for the company in the minds of user as this concept shows that the business is stable and will provide return in future period to the investors.

Advantages

Examples

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

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.

by Angel S 1st year BBA (BPM)

Thanks!