Does the historical cost convention make the going concern convention unnecessary? I'd be very obliged for a clear answer.I'm very confused about a question in Business Accounting. Could someone...
Does the historical cost convention make the going concern convention unnecessary? I'd be very obliged for a clear answer.
I'm very confused about a question in Business Accounting. Could someone please help me answer this question? Thanking u all in advance.
According to going concern convention of accounting, transactions are recorded assuming that the business will continue to exist and do business for a long time to come. One implication of this convention is that it becomes meaningful to distinguish between transactions that will continue to yield benefit over a long period of time, and other expenditures whose benefits is consumed or used up in short-term within an accounting period. For examples it is assumed expenses incurred on plant and machinery is expected to provide service to the firm for a long period, and therefore the total cost of such assets is not charged to expenses immediately when the assets are acquired. Rather the total cost is charged to business expenditure over a long period in the form of depreciation.
The historical convention of accounting emphasizes that the accounts are intended to record, analyse and present impact of transactions that have already occurred. An accounting system does not attempt to forecast events in future. Adherence to this convention ensures that unrealistic and incorrect picture of firms financial position is not presented based on expectations rather than facts. It may appear that this convention is conflicting with the going concern convention which allows, or even requires long term impact of some transactions to be taken into consideration. But there is a fine difference between forecasting based on assumptions and recognizing the physical continuity and utility of some assets created by the firm. For example, an accounting system cannot assume that its turnover will continue to grow at the rate of 20 percent per year, and based on that apportion some of its cost to future sales. However, it can assume that a machinery installed by it will continue to be in working order for some specific number of years. And based on this the full cost of the machinery need not be charged to expenses immediately.