Going concern basis

Financial statements you’re preparing, unless you’re planning to close down the business and are liquidating, should be prepared on a going concern basis. If the situation is that you’re not able to continue trading and are going into bankruptcy, the requirement is moot of course, however normally it’s expected that a company is able to continue doing business. 

“Going concern basis” means is that the company is able to continue doing business for at least the next 12 months following from the date of signing off the financial statements. It means that the company will not based on the figures presented in the reports (i.e. the working capital is positive, the equity is strong etc.) and based on the information given (i.e. legal cases) and information known to the management (i.e. investments needed for renovations etc.) face any serious financial difficulties so grave that liquidation is a serious consideration in the next 12 months. One cannot presume any longer period obviously due to much unknowingness there is and even then this 12-month period is considerably long. It’s presumed though that usually transactions and whatnot should be present or revealing themselves before becoming serious and hence this 12-month period.

When you’re preparing your financial statements always make a habit of reviewing what you disclose and how would the figures seem to someone else. For an example, in the case of a negative working capital for which you’ve got a solution or you’re not considering this as something bad, make a short note to the statements saying why you have still used the going concern basis.