Which of the following principle assumes that a business will continue for a long time?

Going concern concept is one of the accounting principles that states that a business entity will continue running its operations in the foreseeable future and will not be liquidated or forced to discontinue operations for any reason.

In other words, a going concern is expected to have the following things working in their favour:

1. The business is capable of running the daily operations and has capital and raw materials to do so.
2. A business has the ability to pay off the debt during the accounting period.
3. There should be demand in the market for the products or services offered by the company.
4. There should be no changes in the law governing the business.

Importance of Going Concern Concept in Accounting

Going concern concept is very important for the generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The concept of going concern plays a significant role in the way assets are treated.

The concept of depreciation and amortization are based on the assumption that a business will continue to perform its operations in the near future (this period is the next 12 months after an accounting period).

Advantages of Going Concern Concept

Following are some of the advantages of the going concern concept

1.Companies during the formation years will be purchasing fixed assets that will be requiring expenditure upfront, but such assets will be providing the benefits spread over a long term, that is well beyond one accounting period. Therefore, the going concern concept provides a way to record the value of such assets.

2. It is the basis on which the profits and losses of the business are recorded for the year to which it belongs.

Disadvantages of Going Concern Concept

Listed below are some of the disadvantages of the going concern concept:

1. Financial statements are prepared at cost and not on the basis of current market value. In such a case, if the company in an event of liquidation, will have assets valued at the market value, and as such these values will be different from the value determined at cost.

2. In the event of business being liquidated, the financial statements will be calculated on the on going concern basis, which can be misleading for the stakeholders.

This was all about the topic of Going Concern Concept, which is an important topic of Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

The going concern principle is the assumption that a business will continue to exist in the near future, in other words, that it will not liquidate or be forced out of business.

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As an accounting principle, the going concern principle serves as a guideline which allows readers of a business’s financial statements to assume that the business will continue to operate long enough to carry out its current obligations, objectives and commitments.

The importance of the going concern principle

Going concern is an important part of the generally accepted accounting principles. Without it, businesses would not be able to perform accrued or prepaid expenses.The going concern principle allows a business to defer some of their prepaid expenses to future accounting periods, rather than recognising them all at once.

Think about this: If we assume that a business will not be able to operate in the foreseeable future then why would we prepay or accrue anything? Well, if we assume the business might not operate long enough to realize these future expenses, then we would not prepay or accrue anything.

Going concern and cost principle

The going concern principle provides some justification for accountants to follow the cost principle.

If a company is a going concern, it has no intention to liquidate, so why should it report the current value of its long term assets? Yet, if the value of an asset has been damaged or weakened, then the carrying amount of the asset could be reduced to an amount lower than its carrying value.

An example showing the application of the going concern principle is the calculation of depreciation of assets. This depreciation calculation is based on the expected economic life of the asset, as opposed to its current market value.

Businesses assume that they will continue operating for an indefinite period of time, and that their assets will therefore be used in the business until they have fully depreciated.

The significance of accounting principles

Accounting principles serve a significant purpose of standardising the way in which businesses perform their financial reporting activities.

It is important for all businesses to keep track of their financial statements, and ensure that they are correctly and efficiently drawn up. With Debitoor invoicing software you can instantly extract and download your financial statements at any point in time!