Going concern is an accounting term for a business that is assumed to meet its financial obligations when they become due and continue its operations without the threat of liquidation [2]. This assumption is fundamental to the preparation of financial statements, as it implies that the business will remain in existence long enough for all its assets to be fully utilized.
Key Facts
- Definition: A going concern is an accounting term used to describe a business that is assumed to meet its financial obligations when they become due and continue its operations without the threat of liquidation[2].
- Financial Stability: A going concern is financially stable enough to meet its obligations and continue its business activities for at least the next 12 months or the specified accounting period.
- Going Concern Assumption: The going concern assumption is a fundamental principle in the preparation of financial statements. It assumes that the business will remain in existence long enough for all its assets to be fully utilized.
- Preparation of Financial Statements: Financial statements are prepared under the going concern basis of accounting, assuming the business will continue its operations. This includes recording assets and liabilities based on the expectation that the entity will be able to realize its assets, discharge its liabilities, and obtain refinancing if necessary.
- Evaluation by Auditors: Auditors evaluate an entity’s ability to continue as a going concern for a period of at least one year following the date of the financial statements being audited. They consider factors such as negative trends in operating results, loan defaults, denial of trade credit, and legal proceedings to determine if there is substantial doubt about the entity’s ability to continue as a going concern.
Financial Stability of a Going Concern
A going concern is financially stable enough to meet its obligations and continue its business activities for at least the next 12 months or the specified accounting period. This means that the business has sufficient assets to cover its liabilities and is generating enough revenue to cover its expenses.
Going Concern Assumption in Accounting
The going concern assumption is a fundamental principle in the preparation of financial statements. It assumes that the business will remain in existence long enough for all its assets to be fully utilized. This assumption allows accountants to defer certain expenses and assets in financial reports, as they are expected to be realized or utilized in the future.
Preparation of Financial Statements Under Going Concern
Financial statements are prepared under the going concern basis of accounting, assuming the business will continue its operations. This includes recording assets and liabilities based on the expectation that the entity will be able to realize its assets, discharge its liabilities, and obtain refinancing if necessary.
Evaluation of Going Concern by Auditors
Auditors evaluate an entity’s ability to continue as a going concern for a period of at least one year following the date of the financial statements being audited. They consider factors such as negative trends in operating results, loan defaults, denial of trade credit, and legal proceedings to determine if there is substantial doubt about the entity’s ability to continue as a going concern.
Sources
[1] Investopedia: https://www.investopedia.com/terms/g/goingconcern.asp
[2] Wikipedia: https://en.wikipedia.org/wiki/Going_concern
[3] AccountingCoach: https://www.accountingcoach.com/blog/going-concern
FAQs
What is a going concern?
A going concern is a business that is assumed to meet its financial obligations when they become due and continue its operations without the threat of liquidation.
What are the characteristics of a going concern?
A going concern is financially stable, has sufficient assets to cover its liabilities, and is generating enough revenue to cover its expenses.
Why is the going concern assumption important?
The going concern assumption is important because it allows accountants to defer certain expenses and assets in financial reports, as they are expected to be realized or utilized in the future.
How do auditors evaluate a company’s ability to continue as a going concern?
Auditors consider factors such as negative trends in operating results, loan defaults, denial of trade credit, and legal proceedings to determine if there is substantial doubt about the entity’s ability to continue as a going concern.
What happens if an auditor has substantial doubt about a company’s ability to continue as a going concern?
If an auditor has substantial doubt about a company’s ability to continue as a going concern, they must disclose this in their audit report. This can have a negative impact on the company’s financial statements and its ability to obtain financing.
What are some examples of events that could raise substantial doubt about a company’s ability to continue as a going concern?
Examples of events that could raise substantial doubt about a company’s ability to continue as a going concern include:
- A significant decline in sales or revenue
- A large increase in expenses
- A default on a loan or other financial obligation
- A loss of a major customer or supplier
- A legal judgment against the company
What can a company do if it is facing substantial doubt about its ability to continue as a going concern?
If a company is facing substantial doubt about its ability to continue as a going concern, it should take steps to improve its financial performance and reduce its risks. This may include:
- Cutting costs
- Increasing sales
- Obtaining additional financing
- Restructuring its debt
- Selling off assets