CA Foundation · Accounting · Theoretical Framework
Kulkarni & Co. has a machine whose book value is ₹2,00,000. The firm is expected to continue operations for many years, so it does not value the machine at its likely forced-sale price of ₹80,000. Which concept justifies this treatment?
The going concern concept justifies it. Since the business is assumed to continue operating for the foreseeable future with no intention of liquidation, the machine is carried at its book value instead of the lower forced-sale value of ₹80,000.
- AGoing concern conceptCorrect
- BCost concept
- CConservatism
- DMateriality
Explanation
The going concern concept assumes the business will continue for the foreseeable future and will not be liquidated, so assets are not shown at forced-sale values. The cost concept explains why assets are recorded at cost initially, but the specific reason for ignoring liquidation value here is the going concern assumption.
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