Procedural Conventions - the Going-concern Convention

Procedural conventions - The going-concern convention

The valuation of assets used in a business is based on the assumption that the business is a continuing business and not one on the verge of cessation. This convention is important: many assets derive their value from their employment in the firm, and should the firm cease to operate the value which could be obtained for these assets on a closing-down sale would be much less probably than their book value.

The mineshaft was sunk originally with the money raised by the issue of shares, and the other assets were financed out of loans which were repaid out of income, which was not distributed to shareholders. In terms of the entity convention the total liability of the company to shareholders is, therefore, £800,000-which is the amount which they might expect to receive if the company ceased to operate. For the time being, apart from £60,000 in gold or cash, the balance of their interest is substantially the mineshaft and the plant and equipment amounting to £700,000. If the gold reef ceased to be -economically workable and the mine had to be abandoned, the mineshaft, being purely a hole in the ground, would become valueless, and so would much of the plant. Hence, it is unlikely that shareholders would get back even a fraction of their investments.

The going-concern convention indicates the need to relate the value of assets to the future profits which they will make possible. This convention opens the way for the method favoured by economists of finding the present value of an asset by reference to the discounted value of future returns which are expected to be derived from the use of that asset.

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Read on: The Money Measurement Convention

The money measurement convention

Both trade and accounting existed before the invention of money, which we know began to circulate in the 6th century B.C. Its role as a common denominator by which the value of assets of different kinds could be compared encouraged the extension of trade. By Roman times, money had become the language of commerce, and accounts were kept in money terms. Hence, there is an accounting tradition which dates back some 2000 years of keeping the records of valuable assets and of transactions in monetary terms. It should not appear surprising, therefore, that accounting... see: The Money Measurement Convention