Going concern concept

 
The going concern concept assumes that an enterprise or the accounting
entity has an indefinite or unlimited life or existence. It means that the
intention of the business is to carry for a sufficiently long period of time to
carry out its existing activities and commitments. It will not be liquidated
or dissolved in the immediate future unless there is clear evidence or a
specific instruction to the contrary.
 
For Example: - where the venture is for a specific purpose like setting up a
stall in an exhibition or fair or the construction of a building or bridge etc.
under a contract, the business comes to an end on the completion of the
project.
 
Experience indicates that in spite of several business failures, enterprises
have a fairly high continuance rate; certain entities have been in existence
for more than a century even though the owners have changed. The
business entities are therefore going concerns in the majority of the cases
and it has proved useful to adopt continuity assumption for accounting
purposes.
 DEFINITION
The idea that a company will continue to operate
indefinitely, and will not go out of business and liquidate
its assets. For this to happen, the company must be
able to generate and/or raise enough resources to stay
operational
 Advantages
 
1.    It provides a sound basis for the income or profit measurement. It means that
the items which provide future economic benefit or which are used for more than
one year are recorded a fixed assets rather than as expenses only because of the
going concern assumption.

 2.    The going concern assumption facilitates the classification of assets and
liabilities into short-term and long-term respectively

 3.    It is due to the going concern concept that the assets and liabilities appear in
the books at cost or book value, as the case may be and not at the market price
since the assets are not intended for sale.

 4.    This assumption is of great help to the investors because they are assured that
the business enterprise will continue to function in the expected manner
performing all the business activities in accordance with the pre-determined goals.

 5.    Current assets are valued at lower of cost or market value in the normal
course of the business
 6.    Information about the consequences of the liquidation is not given
 Drawbacks
 
1.    If a business concern prepares financial statements on a
going concern basis, when it is not actually so, this has a
serious reflection on the truth and fairness of the
financial statements. It may therefore mislead because so
many firms close down (especially during periods of
Recession) after the publication of their accounts which
have been drawn up on the basis of the going concern
principle.

2.    Liabilities that will arise in the event of liquidation are

ignored thereby depriving the unsecured creditors of
important information.
Alternative courses of action cannot be evaluated.
 GOING CONCERN CONCEPT IN BUSINESS

One of the most basic accounting assumptions is the concept that a

business is a going concern. Unless there is significant evidence to
the contrary, it is assumed that a specific business enterprise will
continue to operate for an indefinite period, or at least for the
"foreseeable future"—long enough both to meet its objectives and
fulfill its commitments. Importantly, while the going-concern
concept assumes that the firm will continue to operate for the
foreseeable future, it in no way implies that the firm will make a
profit.
 Conclusion
The going concern principle is among the most important accounting, and
therefore business, principles. Nevertheless, despite the definition of the
principle being relatively straightforward, the application of it can be
fraught with difficulties. At one extreme, we have many examples of
companies that were given a clean going concern bill of health at the end of
one financial year only to find itself in liquidation within 12 months of the
end of that financial year. At the other extreme, we have the significant
difficulties in trying to arrive at a fair value for a company that seems
properly assessed as a failing company.
This article has discussed the role of management, auditors and others in
the going concern assessment of a company and we have explored several
of the issues facing someone who is trying to place a value on a business:
for either going concern or non going concern purposes.