Going Concern Concept

It is assumed that the business of the firm will last for a long time, i.e. the firm will continue to operate in future and will not cease doing business, sell its assets and make final payments to its creditors and owners - in short, the business is a "going concern". Transactions are hence recorded is such a manner that the benefits likely to accrue in future from money spent now or the future consequences of events occurring now are also taken into consideration. The operational implication is that while placing value against items/assets of a firm, what is taken into account is not the value which can be realised by the sale of the assets in the market (unless otherwise specifically so stated in the circumstance), but the value of the goods/ services produced/producible by the use of the assets. By implication again, the business is a value-adder to its resources and its (financial) success rests on, and is measured by, the value added to the resources, or the (excess) difference between the value of its output and the cost of the resources used in creating that output. Also, for example, if a machinery  is bought, its cost would be spread by suitable computations over its expected productive life span in years for ascertaining the profit or loss in each year; the full cost of the machine would not be treated as an expense in the current year itself. Accordingly, the current resale/salvage/ residual value of the assets will be irrelevant in valuing them as they will be used in creation of future output. It is, hence, to be realised that the going concern value cannot go with postulation of liquidation value. 

But for this concept, the intangible assets of the firm cannot be valued. Suffice it to say that any manager worth his salt will not continue with a firm intending to wind itself up. 

At least four advantages result out of this assumption : 

1. A would-be investor will not be discouraged in investing in the firm; 
2. Accounting can be done without enjoining forced sale values of goods and assets; 
3. Tangible assets can be depreciated on the basis of expected life rather than on realizable market value; and 
4. Intangible assets are not forfeited. 

At least one difficulty arises from this concept. Whereas the institution is considered to last long, yet its annual statements and summaries of accounts will be moderated by the expectations of future benefits of expenses incurred now; and this interferes, if not destroys, to some extent, the exactitude of the figures contained in the annual financial statements. 

One exception will be when the life of a venture is known to be of a certain period only; the records will then have to be made accordingly. For example, if X and Y join together for a limited purpose of a short-duration business, say contracting for constructing a building,  the accounting record in this instance will be limited to this period. Any equipment bought under this purpose will be fully charged to this business; and at the end of the period, either X or Y or both will be free to take the equipment at resale value within  prz-settled mutual agreements. The financial statements should clearly state this limitation in this concept.