Net Worth

What is Net Worth?

Net worth can refer to an individual or to a business or company and is simply the difference between the assets and liabilities. The formula for calculating net-worth is as follows:

Net worth = Assets – Liabilities

Business

For a business net worth is usually calculated on the assets and liabilities shown in the balance sheet. This means that it reflects the carrying value of the assets and liabilities and not necessarily their market value.

Since net-worth is based on the balance sheet of the business, it follows from the accounting equation, that it is the same as the equity or the net assets of the business. It should be noted that, in the event that the liabilities are greater than the assets of the business, the net worth can be a negative figure.

Individual

For an individual, the term net-worth generally refers to the market value of their assets and liabilities and as such represents the net wealth of the individual. So for example, if an individual has assets of 300,000 including a house at market value, and has liabilities of 80,000 including a mortgage on the property, then the individuals net wealth would be shown as 220,000.

For further information see the Wikipedia Net Worth definition.

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Last modified August 1st, 2016 by Team

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