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What is the Going Concern Concept?

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ACCA Accounting Basics

What is the Going Concern Concept?

A going concern is an accounting term that refers to a corporation that has the resources to continue functioning indefinitely unless it presents evidence to the contrary. This phrase also refers to a company’s ability to generate enough revenue to stay in business or avoid bankruptcy. If a company is no longer a going concern, it has declared bankruptcy and its assets have been liquidated.

Going concern principles are used by accountants to determine what forms of information should appear on financial statements. Companies that are still in business may choose to record long-term assets at cost rather than current or liquidation value. A corporation is considered a going concern when the sale of assets does not jeopardize its capacity to continue operations, such as the closing of a minor branch office that reassigns staff to other departments within the company.

The notion of going concern is an essential assumption in the preparation of financial statements; therefore, it is assumed that the organisation has neither the intention nor the need to liquidate or reduce the scale of its operations considerably. If management determines that the entity has no choice but to liquidate or reduce the scale of its operations considerably, the going concern basis cannot be used, and the financial statements must be prepared on a different basis (such as the ‘break-up’ basis).

If the accountant considers that an entity is no longer a going concern, the question of whether its assets are impaired arises, which may necessitate a write-down of their carrying amount to their liquidation value. As a result, the value of a corporation presumed to be a going concern is greater than its breakup value, because a going concern may continue to produce profits.

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