Going Concern Assumption

Going Concern Assumption: The going concern assumption is an accounting principle that assumes a company will continue its operations into the foreseeable future and not liquidate or significantly curtail its activities. This assumption is essential for preparing financial statements, as it allows for the valuation of Assets and liabilities based on the expectation of ongoing operations.

Under this assumption, financial statements are prepared with the belief that the company can meet its obligations and continue its operations for at least one year from the date of the financial statements. If there are significant doubts about a company’s ability to continue as a going concern, it must disclose these uncertainties in its financial reports.

Examples:

• A startup company that has secured funding and plans to launch its product within the next year would prepare its financial statements based on the going concern assumption.
• A large Corporation experiencing temporary Cash Flow issues but has a solid business plan and access to Credit would also assume it can continue operations as a going concern.

Cases:

• In 2017, Toys “R” Us reported substantial losses and debt, raising doubts about its ability to continue as a going concern. The company included a disclosure in its financial statements reflecting this uncertainty.
• In contrast, a profitable tech company expanding into new markets would maintain the going concern assumption, preparing its financials with the expectation of ongoing success and growth.