For anyone who has been or is planning to go into the accounting industry, the going concern principle is not new. It is extremely common and floats around a lot.
However, despite knowing about this term, a majority of people are still unaware of what it actually is. Like, knowing it is one thing and understanding its significance is another.
We all know that it’s about a business depicting that its accounts will remain to be good in the foreseeable future. But, let’s dig a little deeper into understanding the going concern principle.
What is the Going Concern Principle?
People in accountancy can verify when I say that the going concern principle is the opposite of bankruptcy. Organizations use this accountancy term to signify that they have the essential resources to continue its operations in the foreseeable future.
It signifies that the company is performing well and has the ability to generate enough revenue to survive any upcoming stormy weather. The governing body regards highly of this term as it provides them a concise picture of the company’s growth and progress.
Concept of Going Concern
The basic concept of the going concern principle is that a company is sustainable. It has the ability to continue fulfilling its objectives, obligations, and commitments if any, in the near future.
The company should have the required resources to continue operating without any kinds of hurdles.
However, any kind of uncertainty regarding a company’s ability demands a proper report by the accountants to the governing body. The governing body requires a statistical analysis of the situation. They need to be informed about the conditions that might bring any supposed financial harm to the company.
Significance of Going Concern
The concept of going concern is ill-explained everywhere. As a result, the importance of this principle is not comprehended correctly by the people. Its interpretation varies and results in complicating everything up.
However, I will try my best to help you understand it by maintaining its originality.
So, let’s say there is a company that has been performing really well. It is doing the best at its going concern and the governing board is extremely content with the progress.
Suddenly, things go haywire and the company starts approaching bankruptcy. Now firstly, the board would like the accountants to turn up with a statistical report for the reasons. But, it is not a feasible option considering that things are getting out of hand really quickly.
So, the company will choose the option of liquidating its assets. Now, generally, the assets might have a respectable worth. However, since the company has to make these decisions in a short time, the worth drops significantly.
This gets extremely unhelpful for a firm, especially in this distressing time, but that’s what bankruptcy forces you to do. This is the reason why the going concern principle needs to be taken seriously. It can save a company from going to a 0 from 100 by identifying the possible setbacks and making the necessary amends for it.
Considering its significance in the business industry, it is important for people pursuing to step in the accounting industry.
I sincerely hope this article helped you grasp the actual meaning of the going concern principle. Please let me know how helpful it was for you in the comments section below.