What does the going concern principle assume about the entity?

The going concern principle is fundamental in financial accounting and assumes that an entity will continue its operations for the foreseeable future, generally interpreted as being able to operate for more than 12 months from the date of the financial statements. This assumption is crucial as it influences how assets and liabilities are valued and reported in financial statements. If an entity is considered a going concern, it can defer the recognition of certain expenses and liabilities, leveraging the potential for future revenue generation.

This principle underpins the preparation of financial statements, emphasizing that the entity will not need to liquidate its assets or stop its operations in the near term. Therefore, when preparing financial statements, accountants operate under the assumption that the entity will maintain its operations, which affects the presentation and valuation of assets and liabilities on the balance sheet.