Going Concern Concept

According to this concept, it is assumed that the business will continue for a fairly long time to come. There is neither the intention nor the necessity for the purpose of liquidating the particular business venture in the foreseeable future. This is because if the results of the business operation were to be accounted for on the basis of the expected liquidation it would be almost impossible for suppliers to supply goods and services and other business firms to enter into any economic transactions with the business entity. On account of this concept, the management accountant while valuing the assets does not take into account the forced sale value of the assets. Moreover, he charges depreciation on fixed assets on the basis of their expected life rather than their market values.

In exceptional situations, where the accountant has fairly good means to believe that either the whole or part of the business is going to be liquidated, it will be appropriate for the firm to report the resources/assets at their liquidation value.

Circumstances under which an enterprise may not be going concern: It will be useful at this juncture to study the circumstances which give indications about the fact that the enterprise is not a going concern or it may cease to be a going concern very soon. In many situations, several circumstances may be present at the same time.

The circumstances involving liquidity problems: An enterprise is said to be suffering from liquidity problems in a case where it is unable to generate sufficient cash from operations in order to satisfy its current obligations including long term debt maturities and possibly dividends. Such a company may not have problems as a going concern in the short period since it may acquire the required funds by raisingthe debts, advances from the holding company, further issue of shares etc. However, such a situation is found not to continue indefinitely.

Following are the circumstances under which a going concern