The article Going Concern Concept Example DEPICTS a Fundamental Principle in Accounting that assumes a ‘Business will continue to operate for the foreseeable future’. This principle is based on the belief that the business will NOT be forced to liquidate its assets or cease operations due to financial difficulties or other factors.
It is an IMPORTANT consideration for Investors, Creditors, and Other Stakeholders who rely on the ‘Financial Statements’ of a company to Make informed decisions.
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Going Concern Concept Example(s) – Practical
There are several EXAMPLES of how the Going Concern Concept is applied in practice.
1. Financial Difficulty
One Example is when a company is going through a period of financial difficulty, but there is a reasonable expectation that it will be able to RECOVER and CONTINUE operating in the future. In such cases, the company’s Financial Statements will still reflect the assumption that it is a ´Going Concern´.
A Retail Store that has experienced a DECLINE in sales due to Increased Competition or Economic Downturn May have a NEGATIVE net income for a certain period. However, if Management expects the situation to improve in the future, they will still report the company as a ´Going Concern´ in their Financial Statements. In this way, stakeholders will have a better understanding of the business’s current situation, as well as its potential for recovery.
2. Sale of Assets Or Merger/Acquisition
Another Example is when a company is preparing to sell its assets or go through a merger or acquisition. In such cases, the potential buyer or partner will often conduct due diligence to ensure that the business is a ‘Going Concern’. They will Examine the company’s Financial Statements, Operations, and Other Factors to determine if it is a VIABLE business that can continue to operate and generate profits in the future.
The Bottom Line
By understanding how ‘Going Concern’ is APPLIED in practice, Stakeholders can gain a better understanding of a company’s current situation, as well as its potential for recovery and future success.
Chartered Accountant – ICAP
Bachelor of Accounting (Honours) – AeU, Malaysia