What is the Going Concern Concept in Accounting?

It is possible for a business to alleviate an auditor’s perspective on its going concern status by ensuring a third-party guarantee the debts of the company or agree to give extra funding when needed. By doing this, the auditor is assured that the business will continue to be operational during the one-year time frame specified by GAAS. Companies must also inform investors and creditors about possible going concern issues. Potential investors have the right to know if the company’s going concern or longevity is in question.

• After conducting a thorough review (audit) of the business’s financials, the auditor will provide a report with their assessment.
• The auditor assesses a company’s capacity to proceed as a going concern for a period not more than one year following the date of the financial reports being audited.
• Accounting concepts are the generally accepted rules and assumptions that assist accountants in preparing financial statements.
• The revenues and expenses of a company must be recognized by the company under the same accounting period.
• The going concern concept supports the use of accrual basis accounting, where revenues and expenses are recognized when earned or incurred, regardless of when cash is received or paid.

Going Concern in Bankruptcy Proceedings

Explore the role of the going concern assumption in ensuring accurate financial reporting and its impact on economic decision-making. The 7th accounting concept is the consistency concept, which holds that the same accounting principles should be consistently applied from one period to another. The going concern concept directly affects some of the most relevant parts of financial statements; this is how it affects the balance sheet, profit and loss statement, and cash flow statement. By contrast, the going concern assumption is the opposite of assuming liquidation, which is defined as the process when a company’s operations are forced to a halt and its assets are sold to willing buyers for cash. The company lost its creditworthiness in the debt market; it was on the verge of insolvency—bankrupt within 1.5 years.

Going Concern and the Companies Act 71 of 2008

The presence of a going concern disclosure in a company’s financial statements has a direct effect on the independent auditor’s report. The auditor has a separate responsibility to highlight this issue for users of the report. Assessing a company’s going concern status involves looking at several factors to determine whether it is likely to continue operating in the near future. If a business is not considered a going concern, it must use a different set of accounting principles, which can lead to adjustments in the financial statements. This is an essential concept for companies, investors, and lenders alike, as it can affect financial reporting, decision-making, and the long-term success and sustainability of the business.

Mitigation of a qualified opinion

To acquire an in-depth knowledge of accounting concepts and also have a look at the advanced level of importance of accounting activities in financial analysis, you can check out this Accounting For Financial Analysts Course quickly. The accrual period allows the supplier to note the income from delivering goods at the time those goods were delivered and not the time when those goods were paid for. The accounting entity concept recognizes a specific business enterprise as one accounting entity, separate and distinct from the owners, managers, and employees of that business. The accrual method in accounting means that “revenue or income is recognized when earned regardless of when received and expenses are recognized https://www.bookstime.com/ when incurred regardless of when paid”.

Potential Consequences for Businesses

Accounting standards like IAS 1 under IFRS mandate such disclosures, offering stakeholders insights into potential risks that could impact future performance. The going concern assumption shapes how financial statements are prepared and presented, influencing financial metrics and disclosures. When a company is considered a going concern, assets and liabilities are valued to reflect their long-term utility. For instance, inventory is valued at cost or net realizable value, whichever is lower, assuming it will be sold in the normal course of business. This ensures assets are not overstated, offering a realistic view of financial health. The going concern idea is not plainly characterized anywhere in generally accepted accounting principles, and so has a wide amount of interpretations in regards to when a company should report it.

Accrual Basis Accounting

This implies that the company will not be forced to discontinue its operations and liquidate its assets at extremely low costs. This is an important concept to financial accounting because many other accounting principles are based on the assumption that companies will not cease to exist at the end of a period. The going concern principle is what establishes the ability for companies to accrue expenses and prepay asset.

• In conclusion, the going concern assumption plays a vital role in the accounting profession, providing a foundation for preparing financial statements and enabling stakeholders to make informed decisions.
• The cost concept states that any asset that the entity records shall be recorded at historical cost value, i.e., the asset’s acquisition cost.
• These economic cycles require entities to be adaptable and for auditors to be particularly astute during their evaluations.
• Usually, when keeping books, accountants do not think that the businesses would soon be bankrupt or be liquidated; this allows the accountants to put a price on assets that can be correct for a long time.
• On the off chance that there is an issue, the audit firm should qualify its audit report with a statement about the issue.
• They are essentially creating a financial fortress that guards against the onslaught of creditor concerns, potentially turning tides in favor of the going concern presumption.

The cost concept states that any asset that the entity records shall be recorded at historical cost value, i.e., the asset’s acquisition cost. Money Measurement concept states that only those transactions are recorded and measured in monetary terms. These are the set of basic rules, laws, regulations, and assumptions which are kept in mind when entering a transaction in accounts books. Experienced accountants keep the entire accounts rule in mind when preparing an accounts book. Quantifiability means that records should be stated in terms of money, usually in the currency of the country where the financial statements are prepared. If a business was not expected to continue operations within the next 12 months, it would likely be forced to close down or declare bankruptcy.

• Consider a retail company that has been operating for several years and has a strong customer base.
• Under this method, assets are revalued at their net realisable value (the cash they would fetch if sold), and liabilities are re-assessed for immediate settlement.
• Creditworthiness plays a crucial role in a business’s ability to operate effectively and maintain its going concern status.
• This doubt may stem from continuous losses, lawsuits, loan defaults, or denial of credit by suppliers.
• Adhering to standards like ISA 570 (Revised), auditors uphold the integrity of financial reporting.
• When financial statements are prepared using the going concern assumption, it is presumed that the company will continue its operations in the foreseeable future, usually at least 12 months from the reporting date.

FAS 152: Accounting for Real Estate Time-Sharing

For creditors, the going concern status is an important consideration when assessing the creditworthiness of a business. For shareholders, a positive going concern status usually demonstrates that the business is stable and likely to continue generating profits in the future. This could CARES Act involve developing a plan to improve cash flow, renegotiating debt or lease agreements, or seeking additional financing.

Going Concern Assumption – A Principle of Financial Accounting

This would result in a change in the set of financial statements, thus offering an improved image of the financial condition of the company. The going concern assumption is a fundamental accounting concept, similar to Consistency Principle and accrual assumption. According to going concern this principle, financial statements are prepared, assuming the company intends to continue operations for the foreseeable future and has no motive or need to shut down. The going concern concept is a cornerstone of accounting that ensures financial statements reflect an organisation’s ability to operate continuously. By assuming continuity, businesses can make informed decisions, allocate costs appropriately, and instil confidence among stakeholders.