Question 14 of 23intermediate💡 UnderstandShort Answer3 marks

Why is it necessary for accountants to assume that business entity will remain a going concern?

Correct Answer

The Going Concern Concept assumes that a business firm would continue to carry out its operations indefinitely, i.e., for a fairly long period of time, and would not be liquidated in the foreseeable future.

This assumption is necessary for accountants because it provides the very basis for showing the value of assets in the balance sheet. Without this assumption, the valuation and treatment of assets would be fundamentally different, as assets would need to be valued at their liquidation value rather than their book value for continuing operations.

Exercise: Questions for Practice - Short Answers | Q: 1 | (Page 19)
For More Understanding

Explanation

The textbook clearly states that the going concern concept is an important assumption of accounting as it provides the very basis for showing the value of assets in the balance sheet. This concept assumes the business will continue operations for a fairly long period and will not be liquidated in the foreseeable future. For a 3-mark question, students should mention: (1) what the going concern concept means, and (2) why it is important - specifically its role in asset valuation in the balance sheet.

Solution Steps

  1. Step 1: Define the Going Concern Concept from the context

  2. Step 2: Explain why this assumption is necessary - it provides the basis for showing asset values in the balance sheet

  3. Step 3: Conclude with the implication that without this assumption, asset valuation would be different

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