Question

What is meant by going concern concept of Accounting.

Explain the going concern concept.

Answer 1

1. This concept assumes that the business will continue for an indefinite period of time. The transactions are recorded in the books of the business on the assumption that it is a continuing enterprise. In the absence of this assumption, no business will purchase fixed assets but only hire them.
2. This assumption is very important as no outsider will enter into any long-term contract with the business. For example, no customer will purchase the product or service of a company which is going to be closed after three or five years. This assumption justifies classification of fixed assets and current assets, as well as short-term and long-term liabilities.

Answer 2

1. It is assumed that the business will continue to exist for a long time in the future. Transactions are recorded on the assumption that the business will exist for an indefinite period of time. It is on this assumption that a distinction is made between capital expenditure and revenue expenditure. Fixed assets are recorded at their original cost less depreciation. Market value of fixed assets is not recorded, as these assets are not to be sold in the near future.
2. A firm is said to be a going concern when there is neither the intention nor the necessity to wind up its affairs. In the absence of this assumption, no outside parties would enter into long-term contracts with the firm for supplying funds and goods. This assumption also justifies the distinction between fixed assets and current assets. The going concern concept also implies that the existing liabilities will be paid at maturity. Unsold stock of goods are taken to the next year.