The going concern principle is a fundamental financial statement assumption that assumes an entity will remain in business for the foreseeable future. Remaining in business means that the entity will not be compelled to end their operations, liquidate their assets, or go into bankruptcy. The going concern principle plays a major role in the accounting standards that allow for the deferral of recognition of expenses and revenue. Since the business is assumed to continue to exist into the future, delayed recognition may be appropriate under certain circumstances. If the business shows signs that it is not in the position to be assumed to continue to exist into the near future, this is known as going concern risk. Some of these signs may include a trend of operating losses, defaulting on loans, legal proceeds against the entity and so forth.
Until recently, the going concern assumption was just that-an assumption. Management was not required to perform specific procedures or to make any express statements on the matter. But when preparing financial statements for each reporting period, management should, in fact, have provisions in place to analyze if there are conditions or events present that may prevent the entity from continuing business one year from the financial statement date. More specifically, if these conditions or events raise substantial doubt that the entity will continue to exist, a statement should be attached to the report to inform the reader of the events that may cause the cessation of business.
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Author(s): Seyam AA and Brickman S
Operating losses, Financial statements, Accounting standards, Accounting principles, Account, Accounting ethics, Accounting information system, Audit, Balance sheet, Banking, Budgeting, Cost Accounting, Credit, Financial Analysis, Financial Reporting,International finance, Reporting Management, spreadsheet design, Statistics, Strategic Cost Analysis, Strategic Information, Taxation, Data envelopment analysis, Technical efficiency, Puretechnical efficiency, Scale efficiency