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The going concern concept states that a business will continue its operations indefinitely. In essence, it assumes that a business entity will not cease operations in the near future. This assumption is fundamental in accounting as it underlies the valuation of assets in the balance sheet.
For example, if a company buys plant and machinery worth ₹50,000 with a useful life of 5 years, the going concern concept dictates that a portion of this cost is recorded as an expense each year, while the remaining balance is treated as an asset.
Thus, when a long-term asset is acquired, its cost is not fully charged against the revenue of the acquisition year. Instead, a part of its value is expensed annually, with the remaining balance shown as an asset.
The significance of the going concern concept includes:
It supports the accurate preparation of financial statements.
Provides a basis for charging depreciation on fixed assets.
Assures investors that the business will continue to generate returns on their investments.
Ensures that the cost of fixed assets is not entirely expensed in the year of purchase.
Allows for the evaluation of a business's future profit-earning capacity.
Read the next article to learn more about the Accounting period concept.