Principle which assumes that a business enterprise will not be liquidated in the near futurea)Prudenceb)Accounting entityc)Accounting periodd)Going concern conceptCorrect answer is option 'D'. Can you explain this answer?

Question

Answer

The going concern concept is a fundamental principle of accounting. It assumes that during and beyond the next fiscal period a company will complete its current plans, use its existing assets and continue to meet its financial obligations.

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According to this concept, it is assumed that the business will continue to exist for a long period in the future. in this we record fixed assets at their original cost and depreciation is charged on these assets without reference to the market value.

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The GOING CONCERN PRINCIPLE is
..the ASSUMPTION that an ENTITY will remain in business for the FORESEEABLE FUTURE.
...Conversely, this means the ENTITY will not be forced to HALT OPERATIONS and LIQUIDATE its ASSETS in the near term.

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It's going concern concept as no business is started with the thinking that it will liquidate in the near futurebut it is always assumed that business will continue to prosper and will not be liquidated in the  future

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Accounting entity

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Going concern concept is also known as continuty assumption.
It is assumed that the enterprise is normally continuing in for the foreseeable future

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Going Concern Concept

The going concern concept is a fundamental principle in accounting that assumes a business enterprise will continue its operations for the foreseeable future and will not be liquidated or forced to cease operations in the near term. It is an underlying assumption that allows accountants to prepare financial statements with the belief that the entity will continue to operate as a going concern.

Importance of the Going Concern Concept

The going concern concept is essential for businesses as it provides a basis for the preparation of financial statements. It allows accountants to record assets, liabilities, revenues, and expenses with the assumption that the business will continue to operate. This assumption is crucial because it ensures that financial statements provide a true and fair view of the company's financial position, performance, and cash flows.

Reasons for Applying the Going Concern Concept

There are several reasons for applying the going concern concept in accounting:

1. Decision-making: The going concern assumption helps stakeholders, such as investors, creditors, and management, make informed decisions about the company's future prospects. It allows them to assess the long-term viability and profitability of the business.

2. Valuation of assets and liabilities: The going concern assumption enables accountants to value assets and liabilities based on their expected future usefulness or repayment periods. For example, long-term assets like property, plant, and equipment are recorded at their historical cost rather than their liquidation value, assuming they will be used in operations for a significant period.

3. Accrual basis of accounting: The going concern concept supports the use of accrual accounting, where revenues and expenses are recognized when earned or incurred, regardless of cash inflow or outflow. This method provides a more accurate representation of the company's financial performance over time.

4. Comparability: The going concern assumption allows for the comparability of financial information across different periods. It enables stakeholders to assess the company's financial performance and position consistently over time, facilitating trend analysis and benchmarking.

5. Going concern disclosures: In cases where there is significant uncertainty about the entity's ability to continue as a going concern, accounting standards require additional disclosures in the financial statements. These disclosures provide transparency and allow users to assess the potential impact on the company's financial position and performance.

Conclusion

The going concern concept is a fundamental principle in accounting that assumes a business enterprise will continue its operations for the foreseeable future. It is important because it provides a basis for preparing financial statements, enables decision-making, facilitates asset and liability valuation, supports accrual accounting, ensures comparability, and requires appropriate disclosures in uncertain situations. By applying the going concern concept, accountants can provide stakeholders with reliable and meaningful financial information to make informed decisions about the company's future.

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