The concept of bankruptcy is difficult to grasp and understand. Often the causes are due to Greed , Economic Conditions or Mismanagement. In essence Bankruptcy is a capitalistic concept-it is the loss of capital, an inability to pay a person’s or company’s creditors.
Accounting is a tool that provides information to management, to identify the potential risks or failure to meet creditor obligations.
In brief bankruptcy is a failure to mannge credit risk!
Accountants are often involved in Restructuring bankrupt or near bankrupt companies to their original potential or at least the Accountants will attempt to keep the company alive until deals can be re-structured with bankers and other creditors.
Bankruptcy Law and Accounting for bankruptcies are two interesting fields that may interest you as an exciting profession to consider!
Experience with the bankruptcy process can provide considerable leverage in finding effective solutions in avoiding the common and not so common economic pitfalls. This is where Accounting for cash flows, budgeting and pro-active management will reduce the risks of bankruptcies.
When a company is bordering on bankruptcy, accountants must prepare financial statements that disclosure the risks of whether the company will survive within the next 12 months.
Going Concern Assumption (IAS 1, Framework for preparing Financial Statements)
The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed.
Read more: link to ca magazine article by Peter P. Farkas: A capitalist concept.
Very interesting Video on the : Economic Meltdown prepared by the CBC , 45 minute video worth viewing. It presents the economic meltdown that occurred in 2008, and which is still prevalent today.
In Class Discussion Questions:
What happens after bankrupcy?
What are the alternatives to bankruptcy?
In your opinion what are the major causes of bankruptcies?