The assumption that a business has perpetual existence is recognized by ___
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Correct Answer: Option C
Explanation:
The going concern concept assumes that a business will continue to operate indefinitely and is not expected to liquidate or shut down in the near future.
This assumption allows accountants to:
- Record assets based on their historical cost rather than liquidation value
- Spread the cost of long-term assets over their useful lives (depreciation)
- Avoid reporting assets and liabilities at "fire sale" values
What does Fire sale means?
"Fire sale" values refer to extremely low prices at which assets are sold quickly, often under pressure or in distressed situations—like during a bankruptcy, liquidation, or financial crisis.
Why it’s called a "fire sale":
The term comes from the idea of a business selling goods at deep discounts after a fire just to recover whatever value is left. Over time, it’s come to mean any rushed sale of assets at much less than their normal market value, usually because the seller is desperate for cash.
Example:
If a company is going out of business, it might sell office equipment worth $10,000 for just $2,000—this $2,000 is considered a fire sale value.
In short, the going concern concept underpins normal accounting practices because it assumes the business will keep functioning long enough to fulfill its objectives.
In accounting:
Under the going concern concept, we assume a business won’t have to sell its assets at fire sale values. But if that assumption is no longer valid (e.g., the business is collapsing), accountants might need to revalue assets at their fire sale or liquidation values, which are usually much lower.
The going concern concept assumes that a business will continue to operate indefinitely and is not expected to liquidate or shut down in the near future.
This assumption allows accountants to:
- Record assets based on their historical cost rather than liquidation value
- Spread the cost of long-term assets over their useful lives (depreciation)
- Avoid reporting assets and liabilities at "fire sale" values
What does Fire sale means?
"Fire sale" values refer to extremely low prices at which assets are sold quickly, often under pressure or in distressed situations—like during a bankruptcy, liquidation, or financial crisis.
Why it’s called a "fire sale":
The term comes from the idea of a business selling goods at deep discounts after a fire just to recover whatever value is left. Over time, it’s come to mean any rushed sale of assets at much less than their normal market value, usually because the seller is desperate for cash.
Example:
If a company is going out of business, it might sell office equipment worth $10,000 for just $2,000—this $2,000 is considered a fire sale value.
In short, the going concern concept underpins normal accounting practices because it assumes the business will keep functioning long enough to fulfill its objectives.
In accounting:
Under the going concern concept, we assume a business won’t have to sell its assets at fire sale values. But if that assumption is no longer valid (e.g., the business is collapsing), accountants might need to revalue assets at their fire sale or liquidation values, which are usually much lower.