Going Concern Concept Video Lecture | Accountancy Class 11 - Commerce

fundamental accounting assumptions the
going concern assumption now the
fundamental accounting assumption just
to step back a little bit are basically
the assumptions which are presumed to
have been followed in preparing annual
accounts so these are basically the
basic assumptions you know which are
assumed to have been followed as the
accounts are prepared okay now what do
you mean by this you know let's say for
example there was a point a and there's
a point B if there is a ball which was
initially lying at Point a and then
after some point in time you notice that
it is there at point B then there are
two things this ball has moved right if
it has moved then the assumption is
something or the other must have pushed
it so there's an assumption which is
there right similarly whenever you see
some kind of annual accounts which are
prepared by companies or let's say for
examples partnership firms or any other
person the assumption is that these
account would have followed certain
basic rules known as the fundamental
accounting assumption the first one of
amongst them is the going concern
assumption now what does this mean going
concern comprising of two words going
means continuing okay going here means
continuing it doesn't means that you are
going out somewhere and concern means a
company or a partnership firm or some
other organization
now it is assumed that when an
enterprise works a concern is
functioning it is functioning for a
sufficient long period of time now why
is this assumption important when we do
the accounting you know there are two
kinds of expenditure capital expenditure
and a revenue expenditure or revenue
items you can say capital items and
revenue items I'll give you an example
for each one of them and then tell you
why is this going concern assumption
important let's say you purchase
machinery and second is you purchase
fuel to run the machinery
okay is there a difference between these
two forget from an accounting
perspective is there a difference lets
me give you another hint in terms of
duration yes why not the machinery which
I purchase is going to work for n number
of years and I mean maybe 1 to 10 or
something like that right whereas the
fuel once it goes into the machinery is
going to be consumed on an immediate
basis right so capital items are some
items which give you some kind of a
recurring benefit as against a revenue
item which does not give you a recurring
benefit the assumption is that the
business is going to continue continuing
continuing concern organization the
business is going to continue for
sufficiently long period of time and
therefore given that the benefit of this
machinery is also going to be available
for that period of time the cost that
you incur let's say you incur 100 rupees
of cost here and 10 rupees of cost here
this entire 10 rupees is put in the
profit and loss account of one year
whereas this hundred of entire cost
because we say that okay we are getting
the benefit of let's say for ten years I
will spread it as a cost as ten ten ten
for ten number of years now if this
business itself is assumed to not last
for more than three years then this
accounting is going to be incorrect
right so the assumption is that the
business is going to be a going concern
that is it is going to continue for
sufficient length of period of time and
therefore the items of expenses can be
bifurcated into capital and revenue
it could be expenses or income may be
right so that's what the going concern
assumption means it means that the
business is going to continue for
sufficient long period of time and
therefore the bifurcation for expenses
or income item can be done by way of
capital or revenue