(1) Going concern assumption: This is an important concept of accounting method. According to this concept when a business is started, it is assumed that the business is going to continue for a long time in the future. Hence it is called assumption of ongoing generation. Following are some examples based on the current generation concept:
(i) Fixed assets are stated in the balance sheet at their cost after depreciation. In other words, productive or permanent assets at market value are not shown in the consolidated balance sheet. Longer in permanent assets business Purchased for use and not for resale. Therefore, instead of showing its market price as expected by the current generation, the market value is shown in the market value.
(ii) Prepaid expenses are shown on the asset side of the balance sheet on the basis of going concern concept that the business is to continue for a long period of time and it is expected that the benefit of such prepaid expenses will be realized in the future.
(iii) Recurring revenue expenditure is often shown on the property side of the balance sheet. Because the going concern assumption is that the business is expected to continue for a long time and the entity will benefit from such expenditure in the future.
(iv) Semi-finished goods are valued on the basis of the amount incurred for them, but not on the basis of their realizable value. This is done based on the concept of ongoing generation. At any point in time a business unit may have semi-finished goods in process. If the business ceases, such semi-finished goods may be of very low value and in that case the cost of such stock should be treated as realizable value; But in the current generation assumption we assume that the production process will continue until the goods are completed and hence finished goods will exist. Hence such semi-finished goods are valued on the basis of cost incurred or waste rather than their realizable value.
(v) Financial statements are prepared at the end of the accounting period. When the life of the business is assumed to be too long based on the current firm’s cradle, every party with an interest in the firm cannot wait until the business is closed for information on the results or status of the business. Hence, regular accounts are written and financial statements are prepared at the end of a fixed accounting period to provide periodic information about the profit or loss of the business and assets and liabilities at the end of a reasonable period. The given statement can also be linked to the concept of accounting
(vi) Expenditure is divided into two sections namely capital expenditure and revenue expenditure depending on the assumption of ongoing generation. Note that assumption of ongoing generation will not be considered in the following circumstances:
(a) the objective of the special purpose entity is accomplished or is likely to be accomplished within a very short period of time;
(b) When an industrial unit is declared a sick unit.
(c) When the pumping unit is in severe financial difficulty and is likely to be dissolved within a short period of time.
(d) When a liquidator has been appointed to wind up the company.
(2) Consistency Concept: The concept of consistency implies that the same accounting policies, procedures and methods should be used every year while preparing accounts and presenting financial statements or reports. In other words, the policies, procedures or methods used in preparing the accounts and financial statements should remain the same year after year. That is, once a firm or unit has decided on a particular method of accounting, it should follow the same method in subsequent years as well. Unless there is a compelling reason not to do so. Accounts are comparable only if such consistency is maintained. If such consistency or consistency is not maintained, the accounts are not comparable and often such accounts can be misleading. For example, if in one year a unit evaluates its stock using the First in First Out (FIFO) method, the same method should be used in subsequent years as far as possible. If the method of stock valuation is changed every year, the accounts are not comparable and different profit and loss positions also appear. The principle of uniformity suggests that methods should not be changed frequently, unless there are compelling reasons to change. Here it should also be remembered that an accounting policy or procedure or method adopted on the basis of accounting principles or concepts does not violate consistency. For example, the principle of unanimity is not violated by carrying out stick valuations year after year at market value or market value whichever is lower. The principle of homogeneity refers to homogeneity at different times; But it does not mean that different types of transactions should have the same accounting procedure or method. This principle suggests that the procedure or method for any one type of transaction should be consistent from one accounting period to another. For example, fixed assets are valued based on their cost whereas stocks are valued at ‘cost or market value, whichever is lower. The principle of unanimity is not violated here.
Implementing the concept of uniformity eliminates personal bias, as accountants have to follow the same rules, methods or procedures every year.
The rationale behind the adoption of this principle is that frequent changes in accounting policies, methods or procedures as per the individual whim of the accountant do not instill confidence in the accounts of the users of financial statements.
