Going business is a principle of accounting that refers to the viability and continuity of a company. To determine if this hypothesis is fulfilled, it is necessary to guarantee the company's activity for a minimum period of twelve months.
Going business is a fundamental principle for the preparation of the financial statements of the company. The main objective for which this hypothesis is included is to know if the company is capable of maintaining its activity. It must be guaranteed that you will not declare bankruptcy in a minimum period of twelve months.
This information is very relevant to the environment of the company. Suppliers, customers and creditors must know the situation of the organization and where it is going. In this sense, in order to acquire the status of a going concern, it is necessary to identify the risks that could end the company.
Going Business Principle and Hypothesis
Regarding the principle of going concern, it refers to the aforementioned. It is an accounting principle that ensures that the company is able to maintain its main activities at least in the short term.
On the contrary, when the going concern hypothesis is mentioned, it refers to the assumption under which the financial statements are prepared. When a company prepares financial statements, it must do so under certain assumptions. For this reason, it is necessary to provide information about whether the company is a going concern or not.
If it is categorized as going concern, the financial statements will be prepared in a different way than what would be done if the company did not acquire this status.
Going Business Assessment
In order to determine if the company complies with the going concern principle, it is necessary to analyze in depth its situation and the environment that surrounds it. In order to obtain the necessary information, it would be interesting to previously carry out a SWOT analysis.
Subsequently, it is necessary to study what is the trajectory of the company. Know your billing history, commercial margins and evolution of the balance sheet. This process will facilitate the task of knowing if the company can prepare its financial statements under the going concern assumption.
Going Business Example
Suppose we are the owners of a company that manufactures furniture for educational centers.
In the city in which we carry out our activity, the construction of four schools and seven academies is planned for next year. We are very well positioned to be the furniture supplier for each facility. In this situation, we could work under the going concern hypothesis.
On the contrary, imagine that the Government prohibits the installation of school furniture that is made with the material that we carry out the production. In this case, we do not have the capacity to readapt ourselves to the required materials, so our company will not be able to benefit from the ongoing business principle.
In conclusion, going concern is an accounting principle that guarantees that a company is able to maintain its activity, at least, in the short term.