Principles of Accounting: 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 Principles of Accounts Notes.