"Going concern" is an accounting term used to describe a business that is expected to operate for the foreseeable future or at least the next 12 months. It assumes that the business can generate income, meet its obligations and doesn’t plan or won’t need to liquidate in the coming year. Show
The going concern concept is a key assumption under generally accepted accounting principles, or GAAP. It can determine how financial statements are prepared, influence the stock price of a publicly traded company and affect whether a business can be approved for a loan. Bench: America's Largest Bookkeeping Service for Small Businesses.Get 30% off Your First 3 Months!How is going concern determined?It is the responsibility of the business owner or leadership team to determine whether the business is able to continue in the foreseeable future. If it’s determined that the business is stable, financial statements are prepared using the going concern basis of accounting. This allows some prepaid expenses to be deferred until a later date. What is the role of a financial auditor?A financial auditor is hired by a business to evaluate whether its assessment of going concern is accurate. After conducting a thorough review (audit) of the business’s financials, the auditor will provide a report with their assessment. Unqualified opinionAn unqualified opinion is a positive outcome. It’s given when an auditor has no concerns about the financial statements of a business or its ability to operate in the future. Lenders, creditors and investors all want to see this type of result. Qualified opinionA qualified opinion, on the other hand, is not what a business wants to see. It's given when the auditor has doubts about the company and the assumption that it is a going concern. A qualified opinion can be a concern to investors, lenders and other stakeholders. Mitigation of a qualified opinionBefore an auditor issues a going concern qualification, company leadership will be given an opportunity to create a plan to take corrective actions that can improve the outlook for the business. If the auditor determines the plan can be executed and mitigates concerns about the business, then a qualified opinion will not be issued. These plans may include:
What are some going concern red flags?No single factor spells imminent doom for a business, but there are red flags that can signal trouble. Here are some situations that could be of concern:
Disclosure of a going concern qualificationWhen an auditor issues a going concern qualification, the way their opinion is disclosed depends on the structure of the business. Public companiesThe auditor is required by the Securities and Exchange Commission to disclose in the financial statements of a publicly traded company whether going concern status is in doubt. This can protect investors from continuing to risk their money on a business that may not be viable for much longer. Private companies
If there’s significant evidence that a privately held business might not be viable under the going concern assumption, the auditor must disclose it in the audit report. Even if the business’s financials aren’t audited, an accountant who has concerns about the business’s viability should disclose those concerns to the business owner. How a going concern qualification affects a businessA business could face the following challenges when receiving a negative audit:
A version of this article was first published on Fundera, a subsidiary of NerdWallet. Which accounting principle assumes that the business will continue for the foreseeable future?Going Concern Principle
This accounting principle assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future.
What accounting concept which assumed that business has a continuous life existence?The going concern principle is the assumption that a business will continue to exist in the near future, in other words, that it will not liquidate or be forced out of business.
What are accounting concepts assumptions?Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts.
Which principle is associated with the assumption that the company will continue on long enough to carry out its objectives and commitments?Going concern is an assumption that the company will continue on long enough to carry out its objectives and commitments.
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