Manag., December-2019 – Q63
- Option : C
- Explanation : Accounting concepts or assumptions are the
foundation of systematic and proper
accounting. Th ey include those basic
conditions upon which the science of
accounting is based. They are as follows:
1. Separate entity concept
2. Going concern concept
3. Money measurement concept
4. Cost concept
5. Dual aspect concept
6. Accounting period concept
7. Periodic matching of cost and revenue concept
8. Realization concept Going Concern Concept The going concern concept assumes that the entity is a going concern, that is, it will continue to operate for an indefinitely long period in the future. In other words, it will not cease doing business, sell its assets, and make final payment to its lenders, creditors, and owners. The operational significance of this assumption is that the assets (say, plant and machinery, office equipment, land, and building, etc.) are not shown in the balance sheet at the value at which they can be sold in the market. Instead, these assets are valued considering their likely contribution to the value of goods produced/services rendered by their use in future years.
Assume the ATCPL purchases machine for ` 50 lakh on April 1, 2007, with expected the economic useful life of 5 years, with no salvage value. Assume further that the machine’s efficiency/productivity is likely to be the same for all its 5-year useful life. Accordingly, ` 10 lakh would be charged as depreciation as an expense for its use in a year 2007-08. On 31st March 2008, it would be shown at ` 40 lakh (` 50 lakh – ` 10 lakh) as an asset in the balance sheet. Obviously, ` 40 lakh does not represent the sale/market value of the assets. Since the assumption is going concerned, the current resale value of the machine is irrelevant.
In valuing assets, therefore, current resale value (of assets shown in the balance sheet) is irrelevant as they will not be sold as such, but rather they will be used in the creation of future output values. In other words, the going concern value is an antithesis of the liquidation value.
