Accounting Concept

Going Concern Concept

By : Raymond Cheung

Sing Yin Secondary School

2001-2002

=Continuity

=持續經營概念

Going Concern Concept

=繼續經營概念

The concept assumes that the business will continue in operational existence for the foreseeable future. These is no intention to put the company into liquidation or to make drastic cutbacks in the scale of operations.

Accounting is done on the assumption that the business will be carried on without any expectation of cessation.

Definition

這項假定是指已經創立的企業個體會按其固定目標，無限期的繼續經營下去。

此項原則亦假設公司是一個永續經營的企業體。即是將清算價值加上繼續經營所產生的效益，此兩種價值的總和。

定義

ApplicationsFixed assets are recorded at historical cost rather than net realizable value. It is because the owner intends to use these assets for a long period of time instead of disposing of them at once.

Possible losses from the closure of a business will not be anticipated in the accounts.

Prepayments, depreciation provisions and research and development costs may be carried forward in the expectation of proper matching against the revenues of the periods.

More….

This concept implies on :

• All the existing resources – They will be used to fulfill the general purposes of a continuing entity rather than sold in tomorrow’s real estate or equipment markets.

e.g. Plant assets, Stocks

• All the existing liabilities – they will be paid maturity in an orderly manner.

e.g. Long-term Liabilities, Creditors

We value the trading stock at the end of an accounting period, assuming they will be sold in the normal course of business in the near future. Also, we do not adopt the liquidating value for our assets and liabilities in our balance sheet.

ExamExampleple

The preparation of accounts on a going concern basis implies that the Revenue Account and Balance Sheet are prepared on the assumption that there is no intention to liquidate or curtail significantly the scale of operations.

Profit and loss account and Balance sheet are prepared for each financial year due to the going concern concept.

ImportanceThe concept assumes the business will continue in existence for a period long enough to enable the enterprise to carry out plans and meet contractual commitments.

It is assumed that the enterprise will not go into liquidation in the foreseeable future, so fixed assets can be recorded at cost rather than net realizable value. Net realizable value does not reflect the true worth of assets because the value of assets may drop significantly or even drop to zero when the enterprise closes down.

LimitationsThis concept does not have a theoretical basis. In reality, no business can continue indefinitely

The concept asserts the use of historical cost. Historical cost is objective but not relevant to the users. The shareholder’s fund only represents the historical cost of the net assets rather than the current value that they can obtain if the unless assets are valued at current prices.

If there is a sudden closure of a business shortly after the last published balance sheet, the financial statements may give misleading information to user about the continuance of the enterprise and the value of its assets.

It is difficult to decide whether the business can go on or not. For example, if the company has no profit this year, it may be due to the recession or the actual problems of the company. Therefore, this concept requires more information to decide the foreseeable future of the business.

Exceptional CaseExceptional CaseIn accounting, going-concern value in excess of asset value is considered an intangible asset and is called goodwill. Goodwill represents the value of a corporation's name, customer service, employee morale, and other such factors that are anticipated to translate into higher earning power. However, as an intangible asset, it does not have a liquidation value and accounting principles require that it is written off over a specific time period.

HKALEHKALE1995 Paper II Question 4 :

The net realizable value is not suitable for valuing fixed assets because it violates the assumption of a going concern.

1997 Paper II Question 4 :

The business is assumed to be continuing in the foreseeable future. There is no intention to liquidate the assets, which should not be valued at net realizable value.

Opposite ViewOpposite View

The opposite view to this going concern or continuity convention is an immediate liquidation assumption whereby all items on a balance sheet are valued at the amounts appropriate if the entity were to be liquidated in piecemeal fashion within a few days or months. This liquidation approach to valuation is usually used only when the entity is in severe, near-bankrupt straits.

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