According the going concern concept, every business should assume that their business will continue to work for an indefinite period i.e., there is no intention of closing the business in the coming future and because of this concept of going concern many revenues and the expenses are deferred for the future periods.
Explanation and Example:
The concept of going concern provides the basis for the preparation of balance sheet as it assumes that the business will continue for an indefinite period so the business entity records the assets and liabilities on the balance sheet as they exists in the business for more than a year. The management who thinks that the business will continue forever makes plans and strategies for the growth and survival of business and uses the assets wisely without any intention to liquidate anything.Because of this concept the prepaid and the accrued expenses and incomes are booked and depreciation on the asset is charged.
Some expenditure is also deferred for more than one year period because of the going concern concept such as advertisement expenditure. The expenditure on advertisement will provide benefits to the business for more than a year say for 5 years. So, if any business spends $10,000 on advertisement then the amount of $10,000 will not be treated as an expense in one accounting year but shall be treated as expense equally for 5 years. So in this case, $2,000 ($10,000/5) will be charged in the profit & loss account for 5 years.
The advantages of going concern concept are:
- The going concern concept provides the basis for recording fixed assets that will give the economic benefits for many years. So these are recorded in the balance sheet at cost and not treated as an expense in the income statement.
- It develops faith for the company in the minds of user as this concept shows that the business is stable and will provide return in future period to the investors.
The disadvantages of going concern concept are:
- In case there are chances when the business may wind up because of the non demand of the product in the market or any other factor then in such a case the financial statements that are prepared on going concern cases may depict the wrong information.
- Any change in the government policy or laws & regulations may impact the concept of going concern of the business and at that times the financial statements prepared following the concept of going concern are needed to be changed.