Crash Course in Accounting and Financial Statement Analysis, Second Edition

Assumption 2: Going Concern

A company is considered viable and a “going concern” for the foreseeable future. In other words, a corporation is assumed to remain in existence for an indefinitely long time.

Exxon Mobil, for example, has existed since 1882, and General Electric has been around since 1892; both of these companies are expected to continue to operate in the future. To assume that an entity will continue to remain in business is fundamental to accounting for publicly held companies.

Advanced Discussion: Why Assume “Going Concern”? The going concern assumption essentially says that a company expects to continue operating indefinitely; that is, it expects to realize its assets at the recorded amounts and to extinguish its liabilities in the normal course of business. If this assumption is incorrect or untenable for a particular company (think of a liquidation or a fire sale), then the methods prescribed by Generally Accepted Accounting Principles (GAAP) for accounting for various transactions would need to be adjusted, with consequences to revenues, expenses, and equity.