Question

When accounting was developed in the 14th and 15th centuries, some businesses had very short lives. For instance, a business might have been created for a ship to sail from Europe to North America and return with furs and other goods. After the goods were delivered and profits were distributed among those who financed the shipment, the business ceased to exist. In more recent centuries, businesses began to experience longer lives. Identify the accounting concept that is needed when accounting for businesses with long lives. Explain what this concept means and why it is necessary for modern-day accounting.

Answer 1

-> Identify the concept :

The accounting concept that is needed when accounting for businesses with long lives is known as the "Going Concern Concept".

-> What this concept means :

Going Concern Concept has become a very famous concept in the modern-day accounting world which basically asks us to assume that the accounting for businesses should be done as if they will operate indefinitely, i.e., they have permanent lives and they will exist forever. In other words there is no plan of closing the business in the forseable future.

-> Why is it necessary for modern-day accounting :

The going concern concept is very important as without this concept, there would be no accrual or booking of prepaid expenses. The going concern concept has revolutionized our modern day accounting in various ways. One such way is accounting for assets. The whole concept of depreciation and amortization is based on the going concern concept since if we don't assume that the business will continue forever there would not be any point of depreciating the asset considering the future. Without going concern concept there would be no differentiation between current and non-current assets/liabilities. Every item of financial statements would be recorded as if it is to be realized soon and everything would be classified as current.

Hence going concern concept becomes extremely important for modern-day accounting as without this concept, the financial statements of the company including Balance sheet, income statement, cash flow and notes to accounts would not depict a true and fair picture of the operations of the company.