Insolvency -
Excess of Liabilities Over Assets

Simply, insolvency is excess of liabilities over assets. Insolvency is a situation where an entity is unable to pay it's debt on due date.

In accounting, an entity is insolvent when balance sheet total liabilities exceed it's realizable assets and is being adjudicated insolvent by the court of law.

An entity, after being adjudicated as insolvent, needs to submit:

I. A Statement Of Affairs and

II. Deficiency Account

Statement Of Affairs:

A Statement of Affairs is like a Balance Sheet with two sides - Liability side and assets side.

Liability Side:

The liability side is classified into four:

Unsecured Creditors as per List 'A':

This list includes the list of all creditors with no security such as unsecured trade creditors, unsecured loan creditors, bank overdraft without security, bills receivable discounted and likely to be dishonored bills payable and promissory notes, salaries, wages, rent over preferential limits.

Fully Secured Creditors As Per List 'B':

This list includes all those creditors who are fully secured to the extent of their claim by insolvent's assets. If any surplus available after meeting the fully secured creditors, the same is transferred to List 'C' (Partly Secured Creditors) to the required extent and then if any balance remains, the same will be transferred to the assets side under the head "Reserves And Surplus".

Partly Secured Creditors As Per List 'C':

This list includes all those creditors whose loans are not fully secured by the assets of the insolvent person. Any surplus from fully secured creditors over which the partly secured creditors have a second charge shall be transferred to List 'C' for the unsecured amount.

Preferential Creditors As Per List 'D':

This list includes preferential creditors who get preference in payment over other creditors. They include the followings:

  1. Debts due to the Government or any local authority.
  2. Rent due to landlord not exceeding rent for one month.
Assets Side:

The Assets side is classified as follows:

Property As Per List 'E':

This list includes all the properties or assets insolvent both moveable and immovable not include in any other list . it excludes the book debts and bills of exchange.

Book Debts As Per List 'F':

This list includes the amount due from sundry debtors and must be shown separately under the headings good debts, bad debts, doubtful debts.

Bills Of Exchange etc As Per List 'G':

This list includes the amount of bills of exchange (bills receivables) and other similar securities in the hands of the insolvent.

Deficiency Account As Per List 'H':

This list reflects that the revenue falls short, which is why the insolvent is unable to pay off his creditors in full. Deficiency is nothing but excess of liabilities over assets of the insolvent.

Deficiency Account:

This account clearly explains the reasons for deficiency of an insolvent person. There is no prescribed format as such for this account as in the case of statement of affairs. The deficiency account is prepared like Capital Account of a sole trader or partner with side reversed.