Which assumption in financial accounting refers to the concept that a business will continue to operate indefinitely?

The going concern assumption is a fundamental principle in financial accounting that posits a business will continue to operate indefinitely, or at least for the foreseeable future. This assumption is critical because it underlies the preparation of financial statements. If a business is expected to continue its operations, it implies that the company will be able to realize its assets and settle its liabilities in the normal course of business. This perspective influences how assets and liabilities are reported and valued; for example, assets may be recorded at their historical cost rather than their liquidation value.

When this assumption is in question—such as during periods of financial distress—financial statements may need adjustments to reflect potential liquidation, as ongoing operations are no longer guaranteed. This assumption effectively informs investors and stakeholders that the business's financial statements do not solely represent transactions and balances at a specific moment but rather give an ongoing view of the business's sustainability and performance over time.

While the monetary unit assumption relates to the consistency of currency in reporting, the time period assumption deals with the discrete intervals of reporting, and the cost principle focuses on the valuation of assets based on their acquisition cost, none of these options directly address the continuity of a business's operations, which is the essence of the going concern assumption.