What Is the Going Concern Concept?
Why accounts assume a business will keep trading, and what changes if it will not.
Home › Accounting Glossary › Going Concern
| Type | Basic accounting assumption |
|---|---|
| Affects | How assets and liabilities are valued |
| Topic | Financial accounting · Concepts |
Going concern in plain English
Because the business is expected to carry on, it can spread the cost of a machine over its useful life through depreciation, and it can carry prepaid expenses forward. It does not need to value everything at what it would fetch in a forced sale.
Worked example
A factory machine cost 50,000 and has a book value of 30,000. Under going concern it is shown at 30,000, because the business will keep using it. If the business were about to close, the machine would be valued at what it could realistically be sold for, perhaps 12,000, and the accounts would be prepared on a different, break-up basis.
- Assuming going concern can never be questioned. Directors must assess it, and doubts should be disclosed.
- Confusing it with profitability. A loss-making business can still be a going concern if it can keep operating.
Frequently asked questions
What happens if a business is not a going concern?
The accounts are prepared on a break-up basis, with assets valued at what they could be sold for and liabilities at amounts expected to be settled.
What are signs that going concern is in doubt?
Repeated losses, an inability to pay debts when due, loss of key customers or finance, and legal or regulatory problems.
Why does going concern matter for depreciation?
Depreciation assumes the asset will be used over its life. If the business were closing, that assumption would not hold.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.