balance sheet test

balance sheet test

the process of ascertaining, from a company's balance sheet, what would be available to members of the company were it to be immediately wound up, with the assets being sold and the liabilities discharged. If, on examination, the company is found to be insolvent (i.e. liabilities exceed its assets), it is an offence for the directors to permit it to continue trading. Any debts incurred by the company by continued trading after the directors are aware that the company is insolvent become the personal liability of the directors.