Solvency, in
finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
or business, is the degree to which the
current asset
In accounting, a current asset is any asset which can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within the current fiscal year or operating cycle or financial year (whichever period is ...
s of an individual or entity exceed the
current liabilities
In accounting, current liabilities are often understood as all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given firm, whichever period is longer.
A more complete definition is t ...
of that individual or entity.
Solvency can also be described as the ability of a corporation to meet its long-term
fixed expenses and to accomplish long-term expansion and growth.
This is best measured using the net liquid balance (NLB) formula. In this formula, solvency is calculated by adding
cash and cash equivalents
Cash and cash equivalents (CCE) are the most liquid current assets found on a business's balance sheet. Cash equivalents are short-term commitments "with temporarily idle cash and easily convertible into a known cash amount". An investment normal ...
to short-term investments, then subtracting
notes payable
A promissory note, sometimes referred to as a note payable, is a legal instrument (more particularly, a financing instrument and a debt instrument), in which one party (the ''maker'' or ''issuer'') promises in writing to pay a determinate sum of ...
.
There exist
cryptographic
Cryptography, or cryptology (from grc, , translit=kryptós "hidden, secret"; and ''graphein'', "to write", or '' -logia'', "study", respectively), is the practice and study of techniques for secure communication in the presence of adve ...
schemes for both
proofs of liabilities
Proof most often refers to:
* Proof (truth), argument or sufficient evidence for the truth of a proposition
* Alcohol proof, a measure of an alcoholic drink's strength
Proof may also refer to:
Mathematics and formal logic
* Formal proof, a con ...
and
assets, especially in the
blockchain
A blockchain is a type of distributed ledger technology (DLT) that consists of growing lists of records, called ''blocks'', that are securely linked together using cryptography. Each block contains a cryptographic hash of the previous block, a ...
space.
See also
*
Accounting liquidity
*
Debt ratio
Debt Ratio is a financial ratio that indicates the percentage of a company's assets that are provided via debt. It is the ratio of total debt ( short-term and long-term liabilities) and total assets (the sum of current assets, fixed assets, and oth ...
*
Going concern
*
Insolvency
In accounting, insolvency is the state of being unable to pay the debts, by a person or company ( debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet i ...
*
Quick ratio
In finance, the quick ratio, also known as the acid-test ratio is a type of liquidity ratio, which measures the ability of a company to use its ''near cash'' or quick assets to extinguish or retire its current liabilities immediately. It is define ...
Notes
References
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External links
*{{Wiktionary-inline
Financial economics