Welcome back! Remember our theoretical framework from our first session? Today we explore a fundamental assumption underlying all accounting: going concern.
Going concern assumes organizations will continue operating indefinitely - not liquidating or shutting down in the foreseeable future.
Engagement Message
Why would this assumption matter for how we value assets?
This assumption shapes everything! When accountants assume you'll keep operating, they value assets based on their ongoing usefulness, not their liquidation value.
Your office building gets valued for continued use, not for what it would sell for in a fire sale.
Engagement Message
Name an asset that would lose the most value in liquidation.
Going concern directly impacts asset measurement. Under normal operations, we record equipment at historical cost and depreciate it over useful life.
But if bankruptcy looms? Suddenly that equipment might only be worth its scrap value, requiring major write-downs.
Engagement Message
Which value would typically be lower - ongoing use value or liquidation value?
The assumption also affects liability measurement. Under going concern, we expect to pay debts through normal operations over time.
But if the company might shut down, creditors might demand immediate payment, changing both timing and amounts owed.
Engagement Message
How would debt payment timing change if going concern became questionable?
This connects to our matching principle! Going concern allows us to match expenses over multiple periods because we assume the company will be around to benefit.
Without going concern, we'd have to recognize all future costs immediately.
Engagement Message
Why would going concern problems affect how we apply the matching principle?
