QS Study

Concept of Going Concern

Going concern is one the fundamental assumptions in accounting on the basis of which financial statements are prepared.

Going concern means financial statements are prepared to assume that a business entity will continue to operate in the foreseeable future without the need or intention on the part of management to liquidate the entity or to significantly curtail its operational activities. The concept is extremely important to generally accepted accounting principles. Without the going concern assumption, companies wouldn’t have the ability to prepay or accrue expenses. It is the responsibility of the management of a company to determine whether the going concern assumption is appropriate in the preparation of financial statements. If the assumption is considered by the management to be invalid, the financial statements of the entity would need to be prepared on break up basis.

The auditors conduct their own evaluation to see whether the going concern assumption is appropriate or not at the time of auditing financial statements even if the company claims to be a going concern. Therefore, it is assumed that the entity will realize its assets and settle its obligations in the normal course of the business.