The Going Concern Principle in Accounting ENSURES Financial Statements reflect the assumption that the business will continue to operate in the foreseeable future. It is based on the idea that Co. Financial Statements should REFLECT its ability to meet its obligations and continue operating as a viable business entity.
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Going Concern Principle in Accounting – IAS 1 Guidelines
Under the Going Concern principle, a company is assumed to be able to continue its operations indefinitely, and financial statements be prepared with the assumption that the company will continue as a ‘Going Concern‘. i.e. the financial statements should NOT reflect the possibility of the company’s Closure or Liquidation in the near future.
1. Preparation of Financial Statements
The Going Concern Principle in Accounting is essential because it PROVIDES a foundation for the preparation of financial statements. It helps users of financial statements, i.e. Investors, Creditors, and Other Stakeholders.
During preparation of financial statements, companies MUST assess their ability to continue as a ‘Going Concern’. This assessment involves analyzing the company’s Financial Position, Cash Flow, and Future Prospects. Companies must also consider any potential risks that could impact their ability.
2. Value of Business
The Going Concern Principle in Accounting is also IMPORTANT in determining the value of a business. Investors and Creditors use financial statements to DETERMINE the value of a company, and the going concern principle allows them to evaluate the company’s current and future financial health. This evaluation includes assessing the company’s Assets, Liabilities, and overall Financial Performance.
For Example, a company that is not assumed to be a going concern may have significantly LOWER values for its assets and liabilities than a company that is assumed to continue as a ´Going Concern´. This can have a significant impact on the valuation of a business and its ability to secure financing from creditors.
3. Significant Doubts
If a Company’s management determines that there is SIGNIFICANT doubts on the company’s ability to continue as a ‘Going Concern’, they must DISCLOSE this information in the financial statements. This disclosure provides users of financial statements with a clear understanding of the company’s financial position and its potential risks.
The Bottom Line
The Going Concern Principle in Accounting ENSURES financial statements are prepared with the assumption that the company will continue to operate as a going concern. It PROVIDES a foundation for the Financial Statements preparation and helps users of financial statements to make informed decisions based on the company’s ability to continue as a ‘Going Concern‘.
Companies MUST assess their ability to continue as a ‘Going Concern’ and DISCLOSE any significant doubts in the financial statements to provide transparency to stakeholders.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)