The certified amount is realisable assets less outside liabilities
One subtraction produces the number on the face of the certificate:
Realisable value of assetsoutside liabilitiesas on a stated date.
The date is not decoration. The figure describes the position on one day and makes no claim about the day after. A bank's own solvency letter is a different document; see the certificate a bank issues instead.
Outside liabilities means everything owed to someone other than the applicant:
- Secured borrowingsSuch as term loans and working capital limits.
- Unsecured borrowingsIncluding loans from relatives and friends.
- Trade creditorsSuppliers waiting to be paid.
- Statutory duesOwed to the state.
- Expenses accrued but not yet paidIncurred by the date, settled after it.
Those amounts are owed to the applicant, not to outsiders. Putting them on the wrong side is the single commonest error in a self-prepared working.
The result is then measured against a named sum rather than left open.
Assets taken at realisable value rather than book value
Land bought decades ago sits in the books at a figure nobody would accept today. Plant carried at written-down value often points the other way: the figure survives long after the machine stopped being worth it. Neither number tells the reader what could actually be raised.
So each class of asset is restated:
- Immovable propertyA registered valuer's report where the amount is material, or the government's notified rate where a conservative basis is acceptable.
- StockWhat it would fetch, with slow-moving lines discounted or dropped.
- ReceivablesAged, with balances beyond the normal collection cycle written down.
- Listed securitiesThe quoted price on the date.
- Unlisted holdingsA stated valuation basis, or left out.
A valuer's report, a broker note, a demat statement, an ageing schedule. Each figure has to be traceable to something a reviewer can pick up. How readily an asset sells shapes the discount applied, and an asset nobody can price is safer left out than argued for.
Liabilities and registered charges deducted in full
Secured borrowings come off in full
The asset they sit on counts only to the extent of its free portion.
Where the applicant is a company, charges on its assets are recorded with the Registrar of Companies.
Searching that register is a real step, not a formality, because the charge holder has first claim whatever the borrower says.
Loans from family and friends, trade dues, unpaid statutory liabilities and any borrowing outside the banking system all come off. Applicants tend to leave out the informal ones because no lender is chasing them, which is exactly why the CA asks for them in writing.
Contingent items are disclosed, not deducted. None of these is a present liability:
- A guarantee given for another borrower
- A tax demand under appeal
- A pending lawsuit
None of them can be ignored either, because each bears on the applicant's capacity to take on a further obligation. The working states what was considered and how, so the judgement is visible rather than buried in a single figure.
Solvency ratios a CA computes behind the certificate
A single total answers one question and hides several. Behind it, the CA tests the same position from other directions:
- Borrowings against owners' fundsHow much of the asset base really belongs to lenders.
- Owners' funds against total assetsHow much of the business the owners have paid for themselves.
- Short-term assets against short-term duesWhether next quarter's payments can be met without selling something long-term.
- Earnings against the interest billWhether borrowing is being carried by the business or by fresh borrowing.
None of these ratios appears on the certificate. All of them shape whether it is signed, and at what amount. What the ratio measures matters more to a reader than the size of the total.
Sometimes a ratio contradicts the headline.
Signing the headline and staying silent about the make-up is how a certificate stops being useful to anyone.
Why the certified amount is lower than the total you expected
Most applicants arrive with a number in mind. It is usually built from what each asset might sell for on a good day, added up at asking prices, with nothing taken off. The working comes out lower for three reasons.
- Every asset is discountedTo what it would realise on the date examined, not on a good day.
- Charged assets come outA property with a loan running on it contributes only its free portion. A deposit marked under lien against a facility is not available at all, whatever its face value. Applicants often count these once as an asset at full value and never as the lender's claim.
- The request caps the figureA certificate is written to the amount named in the notice, so a stronger position simply does not show.
If liabilities exceed what can be realised, there is nothing to certify. A finding that someone cannot pay their debts is a matter for the authorities under a separate process, not something a CA certifies.
Before the evidence is collected
Need a solvency certificate for a tender, court or bank? Talk to a CA about the amount you have been asked to show and the evidence behind it.
Call +91 945 945 6700, Monday to Saturday, 9 AM to 6 PM.
Test your figures in the solvency ratio calculator
Running the numbers first is cheaper than discovering them at the end.
- Enter each asset at what it would realiseNot at what it cost.
- Enter every liabilityIncluding the informal ones.
- Keep charged assets separate from free onesBecause that split changes the answer most.
Read the residual against the amount the notice asks for, and read the ratios against the make-up behind it. Test the figures yourself before collecting any evidence: a working that falls short is worth knowing about while there is still time to act.
An attested position is a separate exercise, and it starts from documents rather than from entries. Getting the position examined and signed covers what has to be produced, what is checked independently, and what finally appears on the certificate. The arithmetic is the easy half.