The accounting term “going concern” refers to a business’s ability to continue operating indefinitely. A going concern is not in danger of liquidation or insolvency. In order for a company to be considered a going concern, it must have adequate levels of cash and other assets to pay its debts as they come due. If a company is unable to meet its financial obligations, it may be forced to declare bankruptcy.
There are several factors that can affect a company’s ability to remain a going concern, such as economic conditions, industry trends, and competitive pressure. Management must carefully monitor these factors and take action to ensure the company’s long-term viability. For example, if sales are declining, management may need to implement cost-cutting measures to reduce expenses.
The going concern concept is important for financial reporting purposes because it determines whether a company’s assets are reported at their historical cost or their current market value. If a company is not considered a going concern, its assets are typically written down to their market value, which can adversely impact the financial statements.