This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
This condition of being unable so to conduct a business that its net earnings will be more than sufficient to cover operating expenses and fixed charges, may be termed "economic insolvency." If the individual partnership or corporation that owns a business of this kind becomes unable or unwilling to put any further capital into it, and also is unable to make an adjustment with creditors or to find a purchaser for the business, then the enterprise may come into the courts and be adjudged bankrupt.
An excellent example of economic insolvency is that of the San Antonio Land and Irrigation Company, Limited, which went into voluntary bankruptcy on November 4, 1914. The company filed a schedule showing liabilities of over $8,-000,000, and assets of approximately $750,000. It had planned to build a large reservoir to store water for the irrigation of 60,000 acres of land. When the plant was completed the district suffered from a drought and the main assets of the company depreciated greatly in value.
Economic insolvency is sometimes defined as "the condition of a business enterprise that exists when the total value of assets is less than the total value of liabilities." In a money-losing corporation economic insolvency will sooner or later come, although it is often concealed by improper accounting.