Which accounting assumption governs this situation?
In the world of accounting, assumptions play a crucial role in guiding the preparation and presentation of financial statements. One such assumption that often comes into play is the continuity assumption. This assumption, also known as the going concern assumption, is the cornerstone of financial reporting and is essential for stakeholders to make informed decisions.
The continuity assumption posits that a business will continue to operate in the foreseeable future, typically for a period of 12 months or more. This assumption allows for the long-term planning and forecasting of a company’s financial health, as well as the proper valuation of assets and liabilities. In essence, the continuity assumption is based on the belief that the company will not liquidate or cease operations in the near term.
In this article, we will delve into the continuity assumption and explore how it governs various accounting situations. By understanding this assumption, we can better appreciate the implications it has on financial reporting and decision-making processes.
