Accounting supposes that the business as an accounting entity will continue to operate for a long time in the future, unless there is superior evidence to the contrary. The enterprise is seemed as a going concern, which is as continuing in operation, in any case in the foreseeable future. The owners have no purpose, nor have they the requirement to wind up or liquidate its operations.
This assumption is of considerable significance, for it implies that the business is looked as a mechanism for adding value to the resources it uses. The success of the business can be measured through the difference between output values as sales or revenues and input values as expenses. Thus, all unused resources can be reported at cost quite than at market values as, as per to the continuity concept, the future instead of selling them out rightly in the market.
The assumption about the business is not expected to be liquidated in the foreseeable future, actually establishes the basis for a lot of of the valuations and allocations in accounting. For illustration, depreciation or amortization procedures rest on this concept. This is this assumption that underlies the decision of investors to commit capital to enterprise. The notion holds that continuity of business activity is the sensible expectation for the business unit for that the accounting functions is being performed. Merely on the origin of this assumption can the accounting process continue stable and attain the objective of correctly recording and reporting on the capital invested, the position of the enterprise and the efficiency of management as a going concern. In this assumption neither liquidation values nor higher current market values are of particular importance in accounting. This assumption gives a origin for the application of cost in accounting for assets.
Though, if the accountant has good reasons to believe that the business, or a few part of it, is going to be liquidated, or which it will cease to operate as like in a year or two, then the resources could be reported on their recent values or liquidation values.