The situation of bankruptcy or insolvency proceedings, and the situation of financial stability is indicated by the tool working capital accounting.

One of the uses of accounting is that it allows to know the economic and financial situation of the company, and thus able to make the right decisions bearing in mind the situation that accounting described. Without knowing this, it is impossible to make the right decisions.

capital_s

Analysis of balance

In the field of balance sheet analysis To know the assets of the company, the working capital is a fundamental tool that is calculated from the following mathematical formula:

Working Capital = Current Assets – Current Liabilities.

As the Working Capital And its relation to the liabilities or equity, it has different financial situations possible.

Total Financial Stability

When the liability is equal to 0, when the asset is equal to equity, the working capital is equal to current assets. Financial stability is total, as the company has no debt, short or long term. This, on the one hand is positive, as their financial situation without debt guarantees their continuity, but at the same time I must say that a certain degree of debt is positive as it streamlines the operation of the company, and prospers .

Normal financial stability

The working capital is positive, as the current assets is greater than current liabilities, making immediate payments of the company are guaranteed. This is the desirable situation for most companies.

Bankruptcy

The working capital is negative. The Current Assets less Current Liabilities that, so the company can not meet the immediate payments. One possible solution, if possible, would be to convert the short-term debt Long-term debt, to be able to release from the situation of oppression.

Another possibility (less desirable) is to increase the liquidity of the company selling some non current assets. The latter possibility has the problem of compromising one’s own business continuity, if the asset sold is really important for the company. In case you can not solve the problem, the company declares bankruptcy to negotiate debt with creditors.

Long-term financial imbalance

The company is undercapitalized and Equity is 0, being equal to the Active and Passive. The only situation is to increase the capital of the company and renegotiate the debt, and this is not always possible.

Bankruptcy

The bankruptcy occurs in those cases in which the accumulation of losses, the liabilities exceed assets (it has to return more money than the sum of all the properties of the company). Capitalization has occurred and the total loss of credit, which the company disappears.