I use the term solvency to mean 1) that a company is able to pay its obligations when they come due and 2) that a company is able to continue in business.

Some people look to a company’s working capital in deciding whether a company is solvent. They conclude that a company with a positive amount of working capital is solvent. In other words, a company that is solvent has more current assets than it has current liabilities. Stated another way a company that is solvent will have a current ratio that is greater than 1:1.

Others look at a company’s total assets and total liabilities in deciding whether a company is solvent. They might conclude that if a company’s total assets are greater than its total liabilities, the company is solvent.

I suspect that the definition of  solvency varies among people in the same country and from country to country. You should check the legal system in your country to find the appropriate meaning.

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About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the creator of the AccountingCoach Pro which has been praised for its ability to simplify accounting in a way that anybody can understand.

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