Going Concern Concept of Accounting

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Definition of Going Concern Concept (Convention, Principle):

Going concern concept (convention, principle) defines and assumes that a business intends to operate as a business unit for the foreseeable future and has the ability to do so”.

Explanation, Use and Application of Going Concern Concept:

Financial statements especially balance sheets are prepared on the assumption that the business will not close its operations in the foreseeable future. The use of going concern concept, supports historical cost concept of accounting.

Going concern is not applied where there is definite evidence of the termination of business, e.g., in case of business’ insolvency. In these circumstances the expected exit values of the assets are more meaningful than their costs or book values.

Definition of Exit Value:

Exit value is the value which an asset would realize, if disposed of under an enforced sale. Exit value is normally lower than the original costs or book value of the assets.

Example 1:

Read below, where the business can prepare its financial statements by following the going concern convention:

(1) XYZ business is facing cash flows since over the year. Business have not sufficient funds to pay suppliers, workers for salaries and rent payments.

(2) Eagle Shipping Company is facing severe cash flows due to less funds. Government of the country has approved request for funding to Eagle Shipping Company in a senate session to improve cash flow problems of the company.

Solution:

(1) XYZ business should prepare its financial statements over the non-going concern.

(2) As the Government has approved the funds for Eagle Shipping Company, it should prepare its financial statements over the going concern convention.

Example 2:

The book value (Book value is calculated by charging annual depreciation over the cost of the thing) of the Allied Plant as on 31st Dec 2018 is $180000. The depreciation rate on plant is 10%. The market value of this plant on 31st Dec is 200000. Suggest at what value, Allied Plant should be recognized.

Solution:

going concern concept of accounting

Though, the market value of the Allied Plant is higher than the book value. Accountant has to follow the going concern assumption and record the plant at $162000. Because, it is not involved in the business of selling plant.