Question

Write short note on the going concern concept.

Answer 1

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.

Answer 2

The going concern concept is an accounting principle that assumes a business will continue to operate for the foreseeable future without plans to liquidate or dramatically limit its activities. Financial statements are created with the assumption that the company will fulfil its obligations and use its assets over time.