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Going Concern Concept

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Going Concern Concept  – The financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed.

Going Concern concept in Detailed : The Financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the Financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed.

The valuation of assets of a business entity is dependent on this assumption. Traditionally, accountants follow historical cost in majority of the cases.

Suppose Mr. X purchased a machine for his business paying Rs. 5,00,000 out of Rs. 7,00,000 invested by him. He also paid transportation expenses and installation charges amounting to Rs. 70,000. If he is still willing to continue the business, his Financial position will be as follows:

Liability Rs. Assets Rs.
Capital 7,00,000 Machinery 5,70,ooo
Cash 1,30,000
7,00,000 7,00,000

Now if he decides to back out and desires to sell the machine, it may fetch more than or less than Rs. 5,70,000. So his Financial position should be different. If going concern concept is taken, increase/ decrease in the value of assets in the short-run is ignored. The concept indicates that assets are kept for generating bene t in future, not for immediate sale; current change in the asset value is not realisable and so it should not be counted.

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Article by Raju Choudhary Raju has written 537 articles. If you like This post, you can follow CAknowledge on Twitter. Subscribe to CAknowledge feed via RSS or EMAIL to receive instant updates.