Why is the going concern concept important when preparing financial statements?
The going concern concept states that a business will continue its operations for the foreseeable future. This implies that the company will not be forced to discontinue its operations and liquidate its assets at extremely low costs. Show
With this assumption, an accountant can defer the recognition of specific expenses until a later accounting period, when the company will probably still be operating and utilizing its assets in the most efficient way possible. A company is thought to be a going concern in the absence of noteworthy information. A case of such information is a company’s inability to continue operating without significant asset sales or debt restructurings. If such was not the situation, a company would basically be acquiring assets when it knows that it will be shutting down its activities and reselling those assets to another organization. In the event, an accountant accepts that a company is no longer going to be a going concern, this raises the issue of whether its assets are impaired, which may require the write-down of their cost to their liquidation value. Along these lines, the value of a company that is thought to be a going concern is higher than its breakup value since a going concern can possibly keep on earning profits. Assumptions of the Going Concern ConceptThe concept is based on the assumption that the business will continue to operate endlessly until there is an event that may bring about its liquidation. So, to make this assumption work, there are some factors which are assumed to be taken care of, such as:
Examples of Going Concern
Advantages of Going Concern ConceptThere are several advantages of the going concern concept:
Disadvantages of Going Concern ConceptThe going concern concept does come with downsides and limitations:
Instructions for an AuditorThe going concern idea is not plainly characterized anywhere in generally accepted accounting principles, and so has a wide amount of interpretations in regards to when a company should report it. Generally accepted auditing standards (GAAS), however, do have instructions for an auditor in regard to a company’s ability to function as a going concern. The auditor assesses a company’s capacity to proceed as a going concern for a period not more than one year following the date of the financial reports being audited. On the off chance that there is an issue, the audit firm should qualify its audit report with a statement about the issue. It is possible for a business to alleviate an auditor’s perspective on its going concern status by ensuring a third-party guarantee the debts of the company or agreeing to give extra funding when needed. By doing this, the auditor is assured that the business will continue to be operational during the one-year time frame specified by GAAS. ConclusionTo sum it all up, the going concern concept implies that the business will continue for the foreseeable future and thus give a more realistic image of the business from a long-term view. The concept is an internationally recognized accounting principle that businesses follow. The first step is always to disclose the going concern aspect of the business and then keeping that in mind, account for all the financial transactions through a long-term perspective of the business. This concept not only helps build a more systematic approach to the recording of financial information, but it also provides a reasonable understanding of the business, its growth, and long-term financial stability. FAQs1. What is the Going Concern Concept?The Going Concern Concept is the assumption that an organization will continue to operate indefinitely and without needing to liquidate its assets and pay off creditors. Usually, this is valid for 1 year because of this time frame. If a business was not expected to continue operations within the next 12 months, it would likely be forced to close down or declare bankruptcy. 2. How important is the Going Concern in Accounting?The going concern is very important in the accounting world because it gives investors and creditors an idea of how long a business will be around. The more years that are given, the better it is for the company's future stability. If no assurance was given on how long a business would be around, this could make operations difficult for everyone involved. 3. What are the assumptions made for the Going Concern Concept?The assumptions that are made under this principle are: 4. What is an example of a company with a valid Going Concern?An example of this would be Google or Microsoft. These companies have been around for many years and do not show any signs of stopping. 5. What is an example of a company with a doubtful Going Concern?An example of this would be Blockbuster Video. This company filed for bankruptcy in 2011 and was expected to close its doors because the demand for the product or service had decreased significantly over time. Why going concern assumption is important in the preparation of financial statement?The going concern concept is a key assumption under generally accepted accounting principles, or GAAP. It can determine how financial statements are prepared, influence the stock price of a publicly traded company and affect whether a business can be approved for a loan.
How does going concern affect financial statements?The concept of going concern is an underlying assumption in the preparation of financial statements, hence it is assumed that the entity has neither the intention, nor the need, to liquidate or curtail materially the scale of its operations.
Why Is going concern important stakeholders?The concept of going concern is crucial to shareholders because it demonstrates the stability of the entity. This assumption can affect the stock price of the business and their ability to raise capital or draw in more investors.
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