What is: Going Concern

What is Going Concern

Going concern is a term used in accounting to describe a company that is expected to continue operating in the foreseeable future without the threat of liquidation. This concept is important for investors and creditors as it indicates the financial stability and sustainability of a business.

A company is considered a going concern when it has sufficient resources to meet its obligations, such as paying off debts and operating expenses, and generating enough revenue to sustain its operations. This assessment is typically made by management and external auditors based on the company’s financial statements and other relevant information.

When a company is not considered a going concern, it may be facing financial difficulties that could lead to bankruptcy or insolvency. This could be due to factors such as declining revenue, increasing debt levels, or other operational challenges that threaten the company’s ability to continue operating in the long term.

Investors and creditors rely on the going concern concept to assess the risk of investing in or lending money to a company. If a company is not considered a going concern, it may be a red flag indicating potential financial distress and a higher risk of default.

In some cases, a company may disclose in its financial statements that there is substantial doubt about its ability to continue as a going concern. This disclosure alerts investors and creditors to the company’s financial challenges and prompts them to take appropriate action to protect their interests.

Overall, the going concern concept is a fundamental principle in accounting that helps stakeholders evaluate the financial health and viability of a company. By understanding whether a company is a going concern or not, investors and creditors can make more informed decisions about their investments and loans.