Impaired Capital Explained

Impaired capital is the name given to the capital that actually worth less as compared to its worth stated in a company’s financial accounts. The situation of the occurrences of impaired capital arises when the value of the stock of a company declines and now the actual worth of this stock is less than that one recorded in the capital account of the balance sheet. Another common term used for impaired capital is that of deficit net worth. Impaired capital may also be defined as a capital or the value of the assets is less than that of the worth of outstanding shares of the company.

There are a number of reasons due to which a company can be held in a situation of impaired capital. Sometimes companies make poor decisions regarding their investments that result in increasing their liability towards their shareholders where as actual worth of assets is low as a result company develops impaired capital. Sometimes a company takes too many loans and assets don’t have worth to pay off these loans as a result impaired capital produces in the company. There are two ways to tackle impaired capital one is that a company needs to produce more stock and the other is that company has to liquidate in order to fulfill liabilities.

Sometimes financial institutions such as banks can also develop a situation of impaired capital. In this situation the impaired capital must be liquidated if the bank is unable to make up this deficiency.

Other Related Accounting Articles:

• Book Value of Equity per Share
• Undervalued
• Negative Equity
• Different Types of Dividends
• Current Liabilities Explained
• Calculation of Stockholder Equity
• Appraisal Capital Explained
• Accrued Dividend
• Earnings Per Share (EPS) Ratio
• LGD: Loss Given Default