What is the difference between solvency and liquidity?

Liquidity is all about cash and assets near to cash (assets that can be easily converted to cash with incurring minimum cost), while Solvency is the ability of a business entity to meets its debts and financial obligations as they mature. In another word, Liquidity is cash on hand and Solvency is ability to pay debts.

LIQUIDITY: capability of covering current liabilities quickly with current assets.

SOLVENCY: Ability of a business to have enough assets to cover its all liabilities.

 

Liquidity is all about cash and ‘assets near to cash’ (cash equivalents). Asset is considered liquid in the state of cash. If a company is considered liquid, it actually means that its current assets / investments are readily and easily convertible into cash. Non-liquid assets / investments are those which are obligated or held for a certain amount of time and cannot be readily encashed. 

 

Solvency refers to the financial soundness of an entity in its ability to repay its debts and financial obligations as and when they mature. If an entity is able to pay off all its debts when they come due, then it is believed to be solvent. If an entity is incapable of paying back its debts then it is considered as insolvent or bankrupt.

The difference between solvency and liquidity is that when a business is solvent, it has debts that it is unable to settle with its assets. i.e. even if it could sell all its assets, it would still be unable to repay its debts. On the other hand, liquidity is when a business is capable of covering current liabilities quickly with current assets; i.e, its assets are greater than its debts.