Is the going concern important in accounting? what does it mean?

The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. By making this assumption, the accountant is justified in deferring the recognition of certain expenses until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible.

An entity is assumed to be a going concern in the absence of significant information to the contrary. An example of such contrary information is an entity’s inability to meet its obligations as they come due without substantial asset sales or debt restructurings. If such were not the case, an entity would essentially be acquiring assets with the intention of closing its operations and reselling the assets to another party.

Going concern is one the fundamental assumptions in accounting on the basis of which financial statements are prepared. Financial statements are prepared assuming 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. Therefore, it is assumed that the entity will realize its assets and settle its obligations in the normal course of the business.

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 going concern assumption is considered by the management to be invalid, the financial statements of the entity would need to be prepared on break up basis. This means that assets will be recognized at amount which is expected to be realized from its sale (net of selling costs) rather than from its continuing use in the ordinary course of the business. Assets are valued for their individual worth rather than their value as a combined unit. Liabilities shall be recognized at amounts that are likely to be settled.

• Deteriorating liquidity position of a company not backed by sufficient financing arrangements.
• High financial risk arising from increased gearing level rendering the company vulnerable to delays in payment of interest and loan principle.
• Significant trading losses bieng incurred for several years. Profitability of a company is essential for its survival in the long term.
• Aggressive growth strategy not backed by sufficient finance which ultimately leads to over trading.
• Increasing level of short term borrowing and overdraft not supported by increase in business.
• Inability of the company to maintain liquidity ratios as defined in the loan covenants.
• Serious litigations faced by a company which does not have the financial strength to pay the possible settlement.
• Inability of a company to develop a new range of commercially successful products. Innovation is often said to be the key to the long-term stability of any company.
• Bankruptcy of a major customer of the company.

Yes, Going concern is important for business.

An Auditor express his openion in his financial reports on going concern that is having a great importance.

Going Concern, means that the entity continue its business with the certainty that it will neither close its business nor discontinue its operations.

If the financial reports shows that financial results are not favourable and the funds are not available to continue its operations. the auditor puts its qualification.

Going Concern is important because it shows the shareholders the financial stability of the business, which will affect stock price, and because the financial statements are prepared around the assumption that the entity is a going concern.The going concern assumption states that businesses should be treated as if they will continue to operate indefinitely or at least long enough to accomplish their objectives.

Thank you agree with answers

AGREED WITH  ALL

I agree with Miss answer SREEDEVI SUNILKUMAR

The assumption is that a company or other entity will be able to continue operating for a period of time that is sufficient to carry out its commitments, obligations, objectives, and so on. In other words, the company will not have to liquidate or be forced out of business in the foreseeable future.

agree with SREEDEVI SUNILKUMAR

The going concern concept or going concern assumption states that businesses should be treated as if they will continue to operate indefinitely or at least long enough to accomplish their objectives. In other words, the going concern concept assumes that businesses will have a long life and not close or be sold in the immediate future. Companies that are expected to continue are said to be a going concern. Companies that are expected to close in the near future are not a going concern.

AGREE WITH ALL ANSWERS

SPECIALLY 

MISS SREEDEVI ANSWER