What is Accounting Insolvency?

Accounting insolvency, similar to balance sheet insolvency, is a financial situation where an individual or organization’s liabilities (debts and financial obligations) exceed their assets (cash, investments, property, and other resources). In other words, their net worth is negative. This term is typically used to describe the financial health of an entity from an accounting perspective.

Accounting insolvency can be identified by analyzing an entity’s financial statements, specifically the balance sheet, which provides a snapshot of the entity’s assets, liabilities, and equity at a given point in time. If the total value of liabilities is greater than the total value of assets, the entity is considered to be accounting insolvent.