Open In App

Going Concern Concept | Features, Significance and Limitations

Last Updated : 26 Dec, 2023
Like Article

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.

Previous Article
Next Article

Similar Reads

Business Entity Concept | Need, Significance and Limitations
What is Business Entity Concept?Under Business Entity Concept, a business is treated as separate from its owners. Business and owners are two independent entities because business too is considered as an artificial person. If an owner invests money in the business, it will be treated as a liability for the business. However, if the owner takes out
4 min read
Money Measurement Concept | Meaning, Significance and Limitations
What is Money Measurement Concept?Money measurement concept can be defined as the concept under which the business needs to record only those transactions that can be expressed in terms of money. Money measurement concept undertakes only quantitative transactions and not qualitative ones. Qualitative transactions never get recorded in the books of
3 min read
Cost Concept of Accounting | Features, Advantages and Limitations
What is Cost Concept in Accounting?Cost concept in accounting states that the assets should be recorded at the cost at which they are acquired by the business, i.e. historical cost. Assets in the balance sheet should show the acquiring cost unless otherwise stated. Under the cost concept of accounting, all the assets are recorded at the original co
3 min read
Internal Debt | Types, Effects, Significance and Limitations
Internal Debt can be defined as money borrowed from inside the country from sources like Citizens, the Country's banks, the country's financial institutions, business houses, etc. As people and businesses sometimes need to borrow money to pay their expenses, the same goes for the government of any country. The government sometimes may need to borro
4 min read
Concern Over Outsourcing
Every organisation is not competent in every activity, and to get those things done properly and efficiently, it needs to outsource some of its activities from outside. This contracting out of some activities that were earlier performed by the company itself to a third party is known as Outsourcing. For example, Urban Company has started outsourcin
2 min read
Japanese Management: Concept, Nature and Limitations
What is Japanese Management? Japanese management, often referred to as "Japanese-style management" or "Japanese management practices," is a set of management principles and practices that have traditionally been associated with Japanese companies. Due to the success of several Japanese firms in the years following World War II, these practices gain
11 min read
Accounting Period Concept | Types, Advantages and Limitations
What is Accounting Period Concept?Accounting period concept tells the business to record all the transactions for a given accounting period for recording and analysis. Accounting period concept states that all the transactions that occur in a business should be divided into periods. This concept helps in the determination of profit and loss of a pa
3 min read
Knowledge Management: Meaning, Concept, Process and Significance
Knowledge Management (KM) is the process of identifying, creating, capturing, organizing, storing, sharing, and effectively utilizing knowledge and information within an organization or community. It involves managing knowledge resources such as people's expertise, intellectual property, and databases to facilitate learning, collaboration, and inno
5 min read
Six Sigma: Concept, Significance and Precautions
Six Sigma is a powerful methodology for process improvement and quality management that originated with Motorola Corporation. This approach revolves around expressing process capability in terms of defects per million opportunities (DPMO), where a Six Sigma level implies a mere 3.4 parts per million defect probability. At its core, Six Sigma is a d
4 min read
Marketing Intelligence : Concept, Significance, Types and Uses
What is Marketing Intelligence?Marketing Intelligence is defined as the process of collecting the data of the market in which they want to enter or currently working, with the motive to gain more information about the opportunities in the market and gain more profits. The process of Marketing Intelligence is carried out by organizations and compani
11 min read