The Balance Sheet Test is a procedure to ascertain the overall solvency of a business. The test is normally used to check the difference between the market value of the assets of a business and the sum of the market value of the firm’s debt plus the market value of the firm’s equity. Balance sheet insolvency occurs where the value of a company’s assets is less than the value of its liabilities, taking into account both contingent liabilities. The term “liabilities” goes beyond debts and includes liquidated and unliquidated liabilities arising from contracts, tort, restitution, etc. The balance sheet test requires that all the assets, liabilities and debts are valued to reflect fair market value. The balance sheet test relies extensively on the valuation of assets and liabilities at fair market value. The balance sheet test is sometimes referred to as Balance Sheet Insolvency Test.