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What is a Going Concern?

John Lister
John Lister

A going concern is a business that is actively trading and expects to do so for the foreseeable future. This means there is no expectation of going into liquidation. That a business maintains this status, unless explicitly stated otherwise, is one of the basic assumptions of accounting.

When a company issues its accounts, it must normally state that the business is a going concern, or detail reasons why this will not or may not be the case. Generally, this concept covers 12 months. Usually, an auditor would have to verify that the company's claim to be a going concern is a sound one.

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Businessman giving a thumbs-up

The fact that a company is a going concern is one of four basic principles that accountants follow. The others are: that the company is a separate legal entity from the people who own or manage it; that the valuation of its assets and liabilities is done entirely in one currency, with no adjustment for inflation; and that the company's accounts can be prepared to cover equal periods of time. These principles are known as the basic accounting assumptions.

Treating a business as a going concern changes the way some elements of accounts are prepared. One example involves depreciation, which is the way that accountants handle the fact that assets lose value over time, for example when a machine becomes outdated and eventually stops working. The exact method of doing this will depend on the relevant accounting laws in the country, but the general principle is to take the overall expected decrease in the asset's value, divide it by the number of years it is expected to be useful for, and then list the resulting sum as a cost in each year's accounts. This affects the taxable income for the business during the year. If a business is not considered a going concern, there will not be a depreciation calculation, and instead the asset will have to be listed at its current market value.

The other main consideration with accounting for a going concern is that businesses can choose between two methods of dealing with the gap between delivering or receiving goods and services, and paying or receiving the relevant money. The cash method involves listing income and expenditure only when the money changes hands, which may be in a different financial year to goods being delivered. The accrual method involves listing income and expenditure as soon as the relevant invoices are issued; in some cases, this means future accounts may have to be revised if and when one party fails to make payment. If a business is not a going concern, the accountants will usually have to use the accrual method to make sure that all assets and liabilities are fully reported, including those where payment hasn't been made before the company is liquidated.

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