Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes: The Going concern concept and consistency concept

  • Going concern and consistency concepts are important in the accounting world

The going concern concept

  • It is one of the most fundamental concepts
  • It forms the assumption on which all accounting operations are carried out
  • According to this concept all accounting transactions must be recorded and reported  with the assumption that the business will continue to operate for the foreseeable future
  • It is assumed that the business will keep Fixed Assets and Current Assets as well as
  • Liabilities
  • it is assumed that the entity will realize its assets and settle its obligations in the normal course of the business
  • If this changes assets should be recorded at their Net realizable value instead of at cost

The consistency concept

  • Due to the nature that a number of transactions can be treated in a number of alternative ways
  • It is possible to constantly create a favorable set of financial statements simply by changing the way these items are created
  • For example depreciation can be accounted for using either the straight line and reducing balance method
  • A business may be tempted hop from method to method depending on which method enhances it’s profit for example
  • The consistency concept prevents this from happening
  • It dictates that once the business adopts an accounting principle or method, it must continue to follow it consistently in future accounting periods
  • Any change in accounting policies/principles must be disclosed
  • This ensures consistent accounting records are comparable from period to period

To access more topics go to the Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes.