Definition: The going concern assumption or going concern principle is an accounting principle that requires companies to be accounted for as if they will continue operating into the future. In other words, we are not supposed to expect companies not to fail. Companies supposed to be treated like they will stay out of bankruptcy and remain in business.
What Does Going Concern Assumption Mean?
This is an important concept to financial accounting because many other accounting principles are based on the assumption that companies will not cease to exist at the end of a period. The going concern principle is what establishes the ability for companies to accrue expenses and prepay asset.
If we automatically assumed that companies ended operations at the end of every period, there would be no reason to accrue expenses. Companies wouldn’t have to pay for these expenses next year because they wouldn’t exist.
The going concern assumption reinforces the matching principle, which states that revenues and expenses need to be accounted for in the period at which they are earned or incurred.
Companies must also inform investors and creditors about possible going concern issues. For instance, if a company is facing financial difficulties from an excessive debt burden or is facing a large liability lawsuit that could bankrupt the company, management must mention these cautions in the financial statement notes. Potential investors have the right to know if the company’s going concern or longevity is in question. If nothing about the going concern is mentioned in the financial statement notes, it is assumed that the company faces no threatening financial problems.