Going Concern Concept

The going concern concept or going concern assumption says that businesses should be assumed to operate indefinitely or at least long enough to achieve their objectives. Put simply, the going concern concept assumes that businesses will operate for a long time and not close or be sold in the near future. Companies that are expected to continue are said to be a going concern. Companies that are expected to close in the near future are not a going concern.

The going concern concept is of great importance to generally accepted accounting principles. Without the going concern assumption, companies would be unable to prepay or accrue expenses. If we didn’t assume companies would keep operating, why would we prepay or accrue anything? The company might not be there long enough to realize the future expenses.

Examples

At a particular point of time, say, Carlos Motors was facing huge financial crises and was about to declare bankruptcy and close all its operations. The Federal government stepped in and gave CM a bailout as well as a guarantee. Usually, GM would not be considered a going concern, but since the Federal government got involved, there’s no reason to consider GM as bankrupt and cease the operations.