Going concern – definition and meaning
A going concern is a company that is currently operating and is also making a profit. In other words, it is a viable company that is not under threat of liquidation for the foreseeable future. In this context, ‘foreseeable’ means for at least the next twelve months. Therefore, the term refers to a business that intends to keep operating successfully at least for the next year.
‘Going concern’ is an accounting term. The going concern principle is the assumption that the business will continue operating successfully for at least the next year. Conversely, people do not expect it to cease trading or liquidate its assets, at least over the near term.
According to Accounting Tools, because of this assumption, accountants can thus justify deferring the recognition of some expenses until a later period. The accountant believes that the company will still be in business then and will be using its assets effectively.
A company that is not a going concern has gone bankrupt and liquidated its assets. The opposite of a going concern or profitable company may also be an unprofitable company.
Accounting Coach says that ‘going concern’ is:
“Going concern is a basic underlying assumption in accounting. The assumption is that a company or other entity will be able to continue operating for a period of time that is sufficient to carry out its commitments, obligations, objectives, and so on.”
“In other words, the company will not have to liquidate or be forced out of business in the foreseeable future.”
Most lay people understand the term as meaning a company that is operating successfully. In this context, ‘lay people’ means individuals who are not accountants.
XYZ Inc. was a going concern. In fact, it was one of the 20 fastest-growing companies in the country. It all ended when the government introduced new legislation. XYZ made electric scooters. Then, the government suddenly decided to ban them (This story is fiction).
Going concern – GAAP
Accounting professionals across the world across the world use the term when referring to an operating and viable business.
‘Viable,’ in this article, means capable of making a profit year after a year.
It is an official term in US GAAP. GAAP stands for Generally Accepted Accounting Principles, the standard rules and guidelines for accounting. GAAP are a series of rules on how to prepare financial statements.
When deciding on what type of reporting to use in financial statements, accountants use going concern principles.
Going concerns may defer reporting long-term assets. In other words, they may report long-term assets in the annual report rather than quarterly earnings.
If a company sells assets that do not impair its ability to operate effectively, it is still a going concern.
For example, a bank may close a branch and move the staff to other departments. The action does not prevent it from still being a going concern.
If a company is not planning to liquidate, why report the current value of its long-term assets? On the other hand, if an asset’s value has been undermined, that asset’s carrying amount may have declined to an amount inferior to its carrying value.
Video – Going Concern Principle
This My Simple Show video explains how accountants interpret and use the term. The speaker talks about a fictitious electric scooter company that suddenly faces unfavorable government legislation.