The Going Concern Concept

This concept simply implies that the business will continue to operate for the foreseeable future and that it isn’t suddenly going to cease trading. The significance of this concept is that the assets of the business are not valued at their “break-up” value, which is the amount that they would sell for if they were sold off piecemeal.

Suppose Jo Bloggs acquired a widget making maching at £100,000 and this machine has an estimated life of 5 years. Let us also assume that the machine has no other use outside Jo Bloggs’ business and could only be sold for scrap at £15,000 after one year. It is normal to write-off the cost of this asset to the profit and loss account, over this timeframe. That is, depreciation of £20,000 per annum would be charged to the profit and loss account. So, at the end of the first year, the value of the machine in the books, would be £80,000, rather than the £15,000 scrap value.

Although it doesn’t seem very prudent, because Jo Bloggs will continue to trade and the machine will therefore be used in the business. It is the “Going Concern” concept that allows the higher valuation.

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