Going Concern
Assumption that a business will continue operating for the foreseeable future.
Definition
The going concern principle assumes a business will continue operating long enough to realize assets and settle liabilities in the normal course of business. This allows assets to be valued at historical cost rather than liquidation value.
If there's substantial doubt about going concern status (e.g., severe cash flow problems, impending bankruptcy), financial statements must disclose this, and auditors will issue a qualified opinion. Banks and investors view going concern warnings as major red flags.
Why It Matters
Going concern is foundational to accounting. If a business isn't a going concern, assets should be valued at what they'd fetch in liquidation (typically much less than book value), and liabilities may accelerate (become due immediately).
Loss of going concern status can trigger loan defaults, customer flight, and supplier refusal to extend credit—creating a self-fulfilling prophecy. Companies fight to avoid going concern warnings.
Examples
- 1
Profitable company with positive cash flow—clear going concern, no disclosure needed.
- 2
Company has recurring losses, working capital deficit, violated loan covenants—substantial doubt about going concern, must disclose.
- 3
COVID-19 forced many businesses to add going concern disclosures due to revenue declines and uncertainty.
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