DEFINITION of 'Accounting Insolvency'

Accounting insolvency refers to a situation where the value of a company's liabilities exceeds the value of its assets. Accounting insolvency looks only at the firm's balance sheet, deeming a company "insolvent on the books" when its net worth appears negative. This is also known as technical insolvency. Actual insolvency is also known as cash-flow insolvency and occurs when a company is unable to make promised payments to vendors or lenders.

BREAKING DOWN 'Accounting Insolvency'

Accounting insolvency is a different approach to insolvency than cash-flow insolvency. The latter involves a firm missing or being unable to make a debt-servicing or other payment, while the former is declared exclusively upon examination of the firm's balance sheet regardless of its ability to continue its operations. When a firm appears to be insolvent on the books, it is likely the debt holders will force a response. The company may attempt to restructure the business to alleviate its debt obligations, or be placed in bankruptcy by the debt holders.

Example of Accounting Insolvency

For example, XYZ Company recently took out a loan to purchase a new piece of equipment. The loan was very large, almost the entire value of the piece of equipment. Soon after purchasing the equipment, a technological upgrade in the marketplace caused the equipment XYZ Company purchased to drop significantly in value. Currently, the assets possessed by XYZ Company are less than the value of their liabilities. Although they have plenty of cash-flow on hand to continue operations, they are said to be technically insolvent, or they have an accounting insolvency.

  1. Bankruptcy Risk

    Bankruptcy risk refers to the likelihood that a company will ...
  2. Junior Security

    A security that ranks lower than other securities in regards ...
  3. Certified Insolvency And Restructuring ...

    Certified Insolvency And Restructuring Accountant - CIRAA - is ...
  4. Bridge Bank

    A bridge bank is a bank authorized to hold the assets and liabilities ...
  5. Central Guarantee Fund

    A fund set aside by state insurance regulators to pay out claims ...
  6. Assumption Endorsement

    Assumption Endorsement states that, if the original insurer becomes ...
Related Articles
  1. Retirement

    Can Your Pension’s Cost-of-Living Clause Be Frozen?

    Recent events in New Jersey prove that relying on a pension alone to fund your retirement is risky. Make sure you have multiple retirement income sources.
  2. Investing

    How to Analyze a Company's Financial Position

    Find out how to calculate important ratios and compare them to market value.
  3. Retirement

    Consolidating Your Retirement Money

    By midlife, you're likely to have accumulated a string of IRAs, 401(k)s and the like. This tutorial helps you organize them around your retirement goals.
  4. Investing

    Market value versus book value

    Understanding book value and market value is helpful in determining a stock's valuation and how the market views a company's growth prospects in the future.
  5. Investing

    Reviewing Liabilities On The Balance Sheet

    As an experienced or new analyst, liabilities tell a deep story of how a company finances, plans and accounts for money it will need to pay at a future date.
  6. Investing

    Reading the Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  7. Investing

    Will Corporate Debt Drag Your Stock Down?

    Corporate debt can mean a leg up for firms, or the boot for investors. How to tell the difference.
  8. Managing Wealth

    The Different Between Preferred and Common Stock

    Preferred and common stocks are different in two key ways.
  1. How should investors interpret accounts receivable information on a company's balance ...

    Analyze accounts receivable information on a company's balance sheet carefully. Receivables offer confidence of future cash ... Read Answer >>
  2. What is the difference between preference and ordinary shares?

    Preferred shareholders have a higher priority claim to the assets of a corporation in case of insolvency than common shareholders. Read Answer >>
  3. What are some strategies companies commonly use to reduce their debt to capital ratio?

    Explore the different strategies that companies can employ and steps that can be taken to reduce a company's debt to capital ... Read Answer >>
Hot Definitions
  1. Investment Advisor

    An investment advisor is any person or group that makes investment recommendations or conducts securities analysis in return ...
  2. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  3. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  4. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  5. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  6. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
Trading Center