going concern concept

What is Going Concern Concept?

This accounting concept assumes that an entity is a going concern that is, it will continue to operate for an indefinitely long period in the future.

Under the going concern concept, there is no need to constantly measure an entity’s worth to potential buyers and it is not done. Instead, it is assumed that the resources currently available to the entity will be used in future operations.

However, the accountant has good reason to believe that an entity is going to be liquidate. Then its resources should be reported at their liquidation value. However such circumstances are very uncommon.

Going Concern Concept Example

Suppose, XYZ is a blue jeans manufacturing firm. The manufacturer has jeans in various stages of the production process. So, if firm decides to liquidate the business today, then the partially manufacture jeans either have negligible or no value.

Accounting does not make any effort to value these jeans at what they are currently worth. Instead, accounting assumes that the manufacturing process will be carried through to completion. Hence the amount for which the partially completed jeans could be sold if the company were liquidated today is irrelevant.