Going Concern Concept | Features, Significance and Limitations

What is Going Concern Concept?

Going Concern Concept means an organisation would continue its business operations indefinitely till the concept of bankruptcy and/or liquidation invades. This concept assumes that a business will continue to do its operations for the foreseeable future or at least for the next 12 months. The going concern concept has the following assumptions:

• Acceptability of the core product: The company must have reasonably priced goods with innovation to beat its rival firms. The company must provide the customers with good quality products at reasonable prices to retain the customers and to acquire new customers.
• Margin, Growth, and Volumes: An ideal going concern concept firm must have higher sales figures than the previous year. A higher operating and net profit margin is expected from the firm under going concern concept.

Features of Going Concern Concept

1. Continuity Assumption: The concept assumes that a business will continue its operations for the foreseeable future, typically at least 12 months from the reporting date.

2. Basis for Accounting: Financial Statements are prepared under the presumption that the company will continue its normal business activities without any intention of liquidation.

3. Assets Valuation: Assets are recorded at their historical value, depending on the accounting standards, with the expectation that they will continue to be used in the business.

Examples of Going Concern Concept

Provisions: Provisions are made by the business in order to meet contingencies that can occur in the future. Provisions are made with the viewpoint that business will continue to exist in the future and certain contingencies can arise due to the dynamic environment. The viewpoint under which provisions are made is associated with going concern concept, that business will continue to exist in the future.

Significance of Going Concern Concept

1. Accurate Financial Reporting: The going concern assumptions allow financial statements to reflect the true value of assets, liabilities, and equity by assuming that the company will continue its operations for a longer period.

2. Surety to Stakeholders: It provides confidence to creditors and investors that the company is financially stable, which is essential for making decisions regarding investments and landing.

3. Long-term planning: It helps management make informed decisions about the future of the company, including investment strategies and long-term planning.

Limitations of Going Concern Concept

1. Unforeseen Events: It assumes that the company will continue to operate the business despite unforeseen events like natural disasters, economic crises, or any other significant change in the industry.

2. Limited Applicability: It may not be suitable for businesses with clear indications of financial distress, like frequent losses, inability to pay debts or legal issues.