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In preparing accounts and financial statements, accountants follow certain fundamental assumptions, rules, principles or conventions. These rules or principles are more commonly known as accounting concepts

Going concern Concept

The enterprise or business is normally viewed as going concern. It means that a business will continue operating or running for foreseeable future (at least for next 12 months). It is assumed that the business has neither intention nor necessity of liquidation or of curtailing the scale of its operations

This concept assumes that when preparing normal set of accounts, the business will continue for at least next 12 months and it will not go into liquidation or scale down its operations

The benefits of going concern concept is that assets of business will not be valued at "break up value". Break up value is the value of business's assets at the time when a business is forced to sell its asset because of its liquidation. Break up value is normally less than normal market value or price of the assets

However, an enterprise has to disclose the fact that it is going to liquidate in next 12 months and business has to value its assets at break up value

EXAMPLE

A business was commenced on 1st January and it has purchased 5 vehicles, each costing $7000. During the year, the business managed to sell 3 vehicles at the price of $8000 each. How should the remaining 2 vehicles be valued in the following circumstances?

A) There is a sufficient evidence that the business would be liquidated in the next year
B) Business would continue its operations in the next year

Solution

In the first case (A) Since there is a evidence that business won't be continued, business should disclose that its going to discontinue its operation and all asset will be valued at break up price that is less than market price

In the second case (B) because business has an intention to carry on its operations, the asset should be valued on going concern basis, thereby, value of each vehicle should be $7000 in the balance sheet of the business

Importance of Going concern Concept

It serves as the basis for the preparation of financial statement since financial statements are highly influenced by the continuity or discontinuity of a business

The calculation of depreciation expenses are affected by the estimation of successful future operation of a business

In case of a business is going to discontinue its operations, assets need to be valued at breakup value which is commonly less than the market value of assets

Accrual Concept

An accounting concept under which revenues and costs or expenses are recorded as they are earned or incurred and they are not recorded when money is received or paid

EXAMPLE

If a business purchases goods on credit, it should record this transaction at the date of purchase not the time of payment of money it owes and same treatment with revenues is expected

In another example, wherein a business has to pay $2000 as telephone prepaid charges but at the end of accounting period, business has only used the service for $500 and remaining $1500 pertaining to the next year. In this case, business has to record only $500 as expense because it has incurred only that amount of expenses

A business sell goods on credit for $200. In this situation, it should record that $200 as income even though the business is still unpaid for the sale of goods

Importance of Accrual Concept

It helps determine the true and fair financial performance and position of an entity since real expenses and incomes are counted regardless of the date as to when was money paid or received

Accrual concept guides the calculation of true net income or loss for an accounting period

Accrual basis of accounting helps management of a business to evaluate and analyze the true financial position of the business. Thereby, it helps management to predict the future financial position of the company

Strategy formulation and implementation require accurate financial data of an organization such as real figure of net income or loss for an accounting period. During strategy implementation phase, company establishes annual financial objectives and devises financial policies



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