The Going Concern Assumption

The assumption is based on the idea that, when preparing financial statements, an entity is expected to continue its normal business operations for the foreseeable future. In other words, the going concern assumption assumes that a business will remain in operation long enough to fulfill its commitments, complete its existing projects, and use its assets for their intended purposes.

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The following can be reasons why a company is no longer in a going concern, but not limited to:

1. Bankruptcy,

2. Mergers or consolidations,

3. Conversion to a different form of organization (e.g. a sole proprietorship becomes a partnership, a partnership becomes a corporation, etc.), or

4. expiration of stipulated business' life (e.g. the business is established to only operate for 25 years and the 25 years now expire).

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If the business is no longer going concern, it would be encouraged to not defer expenditures to expenses but charge them straight to Capital, or defer income through their respective income accounts but credit them straight to Capital.

 

Say, the business used supplies. The entry can be:

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Owner's Capital -- P100.00

           Cash ---------------P100.00

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Instead of

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Supplies Expense -- P100.00

           Cash ---------------P100.00

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Say, interest receivable is recognized. The entry can be:

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Interest Receivable -- P100.00

    Owner's Capital ------P100.00

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Instead of

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Interest Receivable -- P100.00

      Interest Income ------P100.00