Accounting Concepts - 3.Going-concern Concept or Concept of Continuity:
The going-concern concept means that, in accounting, an enterprise is considered as a going Concern (i.e., a concern that will continue to operate for a fairly long time), and it is from this point of view, it's transactions are recorded in its books.
It should be noted that this concept does not mean permanent continuance of a business. What it really means is that a business will continue to operate for a fairly long period of time.
The significance of this concept is as follows:
(a) It makes a distinction between revenue expenditures and capital expenditures possible and meaningful. It is only when this assumption is made, and accounts are prepared for a short period for a concern which is deemed to have a long life, that some expenditures (i.e., expenditures whose benefit will be exhausted within a year) can be treated as revenue expenditures and others (i.e., those whose benefit will last for many years) can be treated as capital expenditures. If this assumption is not made, and accounts are prepared on the assumption that the concern will last just for a short period of one year, then all expenditures have to be treated as revenue expenditures, and the question of distinction between revenue expenditures and capital expenditures will not arise.
(b) It is because of this concept (i.e., because it is assumed that a business will not be sold or wound up, but will continue to operate for an indefinite period) that the fixed assets are valued for this purpose of balance sheet at their cost prices, and their saleable values or market values are not taken into account.
(c) It is because of this concept that the working life of the fixed assets is taken into consideration, while estimating the depreciation to be provided on the fixed assets.
(d) It is because of this concept that outstanding expenses and outstanding incomes, and pre-paid expenses and pre-received incomes (i.e., incomes received in advance) are taken into account, while preparing the final accounts.
The going-concern concept means that, in accounting, an enterprise is considered as a going Concern (i.e., a concern that will continue to operate for a fairly long time), and it is from this point of view, it's transactions are recorded in its books.
It should be noted that this concept does not mean permanent continuance of a business. What it really means is that a business will continue to operate for a fairly long period of time.
The significance of this concept is as follows:
(a) It makes a distinction between revenue expenditures and capital expenditures possible and meaningful. It is only when this assumption is made, and accounts are prepared for a short period for a concern which is deemed to have a long life, that some expenditures (i.e., expenditures whose benefit will be exhausted within a year) can be treated as revenue expenditures and others (i.e., those whose benefit will last for many years) can be treated as capital expenditures. If this assumption is not made, and accounts are prepared on the assumption that the concern will last just for a short period of one year, then all expenditures have to be treated as revenue expenditures, and the question of distinction between revenue expenditures and capital expenditures will not arise.
(b) It is because of this concept (i.e., because it is assumed that a business will not be sold or wound up, but will continue to operate for an indefinite period) that the fixed assets are valued for this purpose of balance sheet at their cost prices, and their saleable values or market values are not taken into account.
(c) It is because of this concept that the working life of the fixed assets is taken into consideration, while estimating the depreciation to be provided on the fixed assets.
(d) It is because of this concept that outstanding expenses and outstanding incomes, and pre-paid expenses and pre-received incomes (i.e., incomes received in advance) are taken into account, while preparing the final accounts.
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