Going concern is the assumption that a business will keep trading for the foreseeable future and is not about to be wound up. Financial statements are normally prepared on this basis.
What it means
The assumption matters because it changes how things are valued. A going concern records assets at their value in continued use; a business about to close would value them at what they would fetch in a forced sale. If there is significant doubt about survival, that must be disclosed, and in severe cases the accounts are prepared on a break-up basis instead.
Where it fits in
Going concern is one of the fundamental assumptions behind a set of accounts, alongside the accrual basis. It rarely changes day-to-day bookkeeping, including payroll, but it is a key judgement directors and auditors make at year-end.
Key rules
- Assumes the business continues for the foreseeable future.
- Justifies valuing assets at their value in use.
- Significant doubt must be disclosed.
- A fundamental assumption behind the financial statements.
