What is the going concern concept in accounting?

A going concern is an accounting term for a corporation that has the financial resources to continue functioning indefinitely unless it can show otherwise. The ability of a corporation to produce enough money to stay afloat or avoid bankruptcy is sometimes referred to by this word. If a company is no longer in operation, it has gone bankrupt and its assets have been liquidated. Following the dot-com bust in the late 1990s, many dot-com enterprises are no longer viable businesses.

Understanding the Situation

Going concern principles are used by small business accountants to determine what forms of information should appear on financial statements. Companies that are still operating may report long-term assets at cost rather than current or liquidation value. When a firm's ability to continue operating is not harmed by the sale of assets, such as when a minor branch office closes and its staff are reassigned to other divisions within the firm, the company is still considered a going concern.

Accountants in London who consider a company as a going concern believe that it makes good use of its assets and does not need to liquidate anything. Going concern principles can also be used by accountants to assess how a company should proceed with asset sales, expense reductions, or product shifts.

The term "going concern" is not defined in generally accepted accounting principles (GAAP), but it is defined in generally accepted auditing standards (GAAS).

Red Flags That a Company Isn't Going to Survive

On financial records of publicly listed corporations, several red flags may surface that signal a corporation may not be a going concern in the future. Long-term assets are typically not listed in quarterly financial statements or as a line item on balance sheets. The valuation of long-term assets may signal that the corporation intends to sell them.

Inability to meet obligations without significant restructuring or asset sales may also indicate that a company is not a going concern. If a corporation buys assets during a reorganization, it may intend to sell them afterward.

Concerning Situations

Accounting rules attempt to identify what information a company should report on its financial statements if its ability to continue as a going concern is in doubt. Financial statements should indicate the conditions that justify an entity's serious doubt that it can continue as a going concern, according to the Financial Accounting Standards Board, which decided in May 2014.  Management's view of the situation and future intentions should also be included in the statements.

An auditor checks a company's financial statements to see if it can continue as a going concern for one year after the audit. Negative patterns in operating performance, continuing losses from one quarter to the next, loan defaults, lawsuits against a company, and denial of credit by suppliers are all factors that raise considerable doubt about going concern

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