The Going Concern Theory is the assumption that a business will continue to operate indefinitely, or at least for the foreseeable future. This theory is central to financial reporting because it affects how assets and liabilities are valued and reported.
When preparing financial statements, accountants assume that the company will keep operating and not be forced to liquidate. This allows assets to be valued based on their ongoing use, rather than at potential liquidation values. For example, a factory building would be listed at cost, not at what it might fetch if sold. This continuity assumption also impacts depreciation and amortization, as assets are depreciated over their useful lives rather than written down to zero immediately.
However, if there are signs that a business might not survive, like significant losses or major financial obligations, auditors may question this assumption. If the Going Concern status is in doubt, companies must disclose this in their financial statements, impacting investor confidence.
The Going Concern Theory gives businesses flexibility in financial planning and helps them project stability. It also encourages transparent financial disclosures, supporting trust between the business and its investors. For this reason, it remains a core principle of accounting theory.
Going Concern - Overview, Conditions, Red Flags.
https://www.indeed.com/career-advice/career-development/going-concern-assumption