Going concern is regarded as a fundamental accounting policy which assumes that the business will run in the foreseeable future (Wood & Sangster, 2004, pp. 97). In other words, the balance sheet of a company prepared on the assumption of going concern, clearly reflects the company’s market value as of today assuming that it would exist for a foreseeable time in future. This concept has been given immense importance because it enables the management to make assumptions and judgments at a specific point in time about the future conditions of the business.
In other words, it is the driving force behind the carrying out a sensitivity analysis of the internal and external environment of the company (Wood & Sangster, 2004, pp. 97). The importance of going concern lies in the fact that it declares that the company is able enough to continue its operations in future (for at least next 12 months). Thus it affects the treatment of accounts and items in financial statements, for e. g. if a company declares that it is no more a going concern, then all its assets would turn current even the plants and machineries.
Similarly, asset valuation is another concept which gets highly affected by the going concern assumption (Victor, 2009). For. eg. assets are stated at the cost minus deprecation instead of their scrap value because if the company will operate in future, these assets will add to the total market value of the firm. Lastly, going concern has an important impact on the business, primarily because it works on the premise of separate entity, which states that even if the owner would die, the business will continue its operations.
Hence, it can be said that if management does not hold, the going concern assumption to be true, not only their financial data and asset valuation will be affected but their ability to devise an action for future or take corrective measures will get paralyzed too. References Victor, D. , (2009). Accounting concepts: Going concern. Accessed 5 June, 2010, from http://www. helium. com/items/1709801-going-concern Wood. F. , Sangster, A. , (2004). Business Accounting. 9th ed. Singapore: Pearson Education, pp. 97.