hi everyone welcome back today in this video we are going to understand going concern concept of accounting see it's very simple let's just read this first it is an assumption that an entity business will continue in operation for the foreseeable future at least the next 12 months what does it mean it means that we make an assumption in accounting that the business will not shut down will not be closed down it will continue in its operation it will do the trading purchase sale or whatever the business is involved in providing services it will continue its operation for the foreseeable future what's the meaning of foreseeable future see there's no exact definition regarding that foreseeable future but the interpretation is that at least the next 12 months at least minimum okay minimum but it will continue for the foreseeable future which we also assume two three four five years like that okay and more also is that clear that's the basic assumption of accounting going concern assumption you can say or concept also and the financial statement which are prepared of the business in accounting financial statements normally are prepared on a going concern basis see here financial statements are normally prepared on the assumption that an entity is a going concern entity is a going concern means what it means that entity will continue its operation for the foreseeable future clear right and it is not going to halt stop its operation it is not going to stop its operations and liquidate the entity liquidate means what legally closing down the business right so that can happen either voluntarily or also compulsorily because of the code order right so that's the thing regarding going concerned concept it's simple but now one more thing you have to understand regarding this that's the valuation of assets see here normally what we do is assets are being valued at historical basis there are also many other models through which you can value the assets but that's normal evaluation we can say yeah and that only happens when the entity is a going concern if the entity is not a going concern if it is not a going concern if it's going to be shut down or liquidated very soon then the financial statements have to be prepared on break up basis break up basis means all the assets and everything will be measured at recoverable or realizable amount for example if the entity was a going concern and if you had an asset let's say this machinery and let's say the cost of the machinery is 50 000 and depreciation was there of this year let's say 10 000. so you will recall this machinery at 40 000. that's the carrying value written down value of this machinery yeah on historical basis you have you know carried this machinery this asset but now if let's say the business is going to be closed down yeah and the financial statements are prepared on break-up basis then what does it mean you cannot record the mercenary like this yeah that's not the true value of the missionary because business is going to be closed down very soon so what you have to see you have to take the net realizable value yeah net realizable value of the machinery all will be measured at recoverable or realizable at recoverable or realizable amount so see here let's say for example machinery can be sold off for 20 000 because you all know right whenever you purchase any asset immediately the value falls you cannot sell that asset at that same price which you purchase for you all know that yeah secondhand you know with the phones also you know that you cannot sell it if you have purchase for one lakh any cell phone you cannot sell it off at one lag only no the price will fall down so immediately the value that is available let's say for example is 20 000 after incurring the selling cost of 1000 maybe dismantling expenditure something is there you have to remove the mercenary carry the machinery yeah so some expenses may be involved selling cost so after deducting the selling cost of 1000 all right you can only be it can only be sold for 20 000 after incurring a selling cost of one thousand so the net realizable value of that machinery would be nineteen thousand twenty thousand you got by selling of the machinery but to sell of that machinery you have incurred one thousand subtract that nineteen thousand is the net realizable value of that machinery so this way the assets will be recorded at work at a recoverable and realizable amount and breaker basis means what break up basis means you are breaking up your business and selling of the components all the assets and everything part by part and then paying off all the liabilities yeah you're liquidating your company your business you're shutting it down legally so what you will do sell off all the assets you can sell up the ass all the asset immediately at their recoverable amount at the realizable values net realizable values not at the book values what used to be there in the financial statements you cannot sell your machinery at fifty thousand forty thousand no whatever you can fetch in the market right now at that value you will be able to sell off right and then less liabilities so that's the breakup basis is that okay so this was the going concern concept here you understood that we assume that entity will continue its operation for the foreseeable future at least next 12 months and the financial statements are also prepared with this exemption going concern assumption that entity is the going concern and it's not going to be liquidated anytime soon and you also understood the valuation of assets right that going concern if entity is a going concern then normal valuation will happen historical basis or many other bases are there through which you can value your assets and then if the entity is not a going concern then breakup bases have to be used and on this breakup basis financial statements will be prepared everything will be recorded at recoverable or realizable amounts net realizable value is that okay so that's all for this video see you in the next video bye