Concept & Measurement of Net Worth

Introduction

Net worth is the remain assets value claim by shareholder's after discharging all the liabilities i.e. long-term and short term liabilities. Net worth is what is owns minus what is owed. Net worth is total assets (include both financial and non-financial assets) minus any total debts you owe. It acts as an indicator of your financial health.

Net Worth

Types of Net Worth

Basically there are two types of net worth explained as bellows:

  1. Personal Net worth: Personal net worth is the amount of a person that is calculated by subtracting total liabilities from total assets. The assets include bank deposit, investment in stock, real estate property, gold, insurance etc. While liabilities include home loan, mortgage loan, car loan, credit card loan, personal loan etc.

  2. Business Net Worth: It is also known as book-value of company or shareholder's equity. Business prepare the balance sheet which is also known as net worth statement. The business net worth or shareholder's equity equals to total assets minus total liabilities of the company.  The total assets of the business is current assets, tangible assets, intangible assets and fictitious assets. While liabilities include long-term bank loan, debt or debentures, etc.

Importance of Net Worth

There are various reasons that supports the importance of net worth listed as bellows:

  • It helps to establish financial stability

  • It helps to identify the direction of moving

  • It helps to decide future financial movement 

  • It helps to react on financial position

Methods for Calculating Net Worth of the Business

It can be calculated by three methods are listed as below:

  1. Working Capital Method: Net Worth = Total Net Assets or (Net Fixed Assets+Total Working Capital) - Total Long_term Liabilities 

  2. Addition Method: Net Worth = Equity Share Capital+ Preference Share Capital+ Additional Paid-up Capital + Reserve & Surplus+Retained Earnings - Fictitious Assets 

  3. Subtraction Method: Net Worth = Total Net Fixed Assets + Total Net Current Assets-Total Net Short_term - Total Long_term Liabilities - Fictitious Assets

Note:

Fictitious Assets: The fictitious word is derived from the word "fiction" which means fake or thing that is imagined. 

The fictitious asset is not really an asset but is written in the side of the assets table while calculating expenses. These type of assets are could not be written in the present accounting period.

There are some example of fictitious assets as:

  • Preliminary expenses

  • The promotional expenses of a business

  • Discount allowed in the issue of shares

  • Loss incurred on issue of debenture

Format for Net Worth Calculation

For Personal

Personal Net Worth Statement
For Business

Business Net Worth Statement

Conclusion

Net worth is the remain value claim by shareholder's after discharging all the liabilities i.e. long-term and short term liabilities. It can be calculated by three methods working capital methods, addition method and subtraction method. Basically there are two types of net worth include personal net worth and business net worth.

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