Net Worth Formula
Net worth is the value of the assets that a person/organization owns minus the liabilities they owe (debts). The net worth formula helps in calculating equity in terms of business. It can be used at various levels such as personal, group, organization, government, or to entire cities/countries. Net worth in the business of an organization describes the financial health of the organization, it is equal to the difference between the value of all its assets and all its liabilities which can easily be found out using the formula for net worth. The net worth formula is explained below along with solved examples.
What is the Net Worth Formula?
Equity generally is used synonymously to net worth, but they sometimes are used in different contexts. The net worth formula is equal to the difference between assets and liabilities. The two most important aspects to remember regarding net worth is:
- If net worth > 0, able to settle liabilities and has good financial growth
- If net worth < 0, unable to settle liabilities, and has negative financial growth
Net Worth Formula
The net worth formula can be derived by subtracting the total liabilities from the total assets of the subject company. Hence, the formula is:
Net Worth = Total Assets – Total Liabilities
Derivation of Net Worth Formula
The net worth formula can be derived by following these simple steps:
- Step1: Determine the total assets of the company that comprises the cash inflow, fixed assets, etc.
- Step 2: Determine the total liability of the company that comprises the debts, short-term borrowing, etc.
- Step 3: Once we have determined the total asset and the total liability, use the net worth formula to determine the net worth
Examples Using Net Worth Formula
Example 1: By using net worth formula, find Sam's net worth from the following balance sheet data:
| Assets | Liabilities | ||
| Properties | $45,00,000 | Property Loans | $20,00,000 |
| Stocks | $20,00,000 | Car Loans | $3,00,000 |
| Savings | $7,00,000 | Education Loan | $8,00,000 |
| Insurance | $12,00,000 | ||
| Jewelry | $50,000 | ||
| Cars | $5,00,000 | ||
Solution:
Total assets value = 45,00,000 + 20,00,000 + 7,00,000 + 12,00,000 + 50,000 + 5,00,000 = $ 89,50,000
Total liabilities = 20,00,000 + 3,00,000 + 8,00,000 = $ 31,00,000
Using the net worth formula:
Net worth = Assets - Liabilities = 89,50,000 - 31,00,000 = $ 58,50,000
Therefore, Sam's net worth = $ 58,50,000
Example 2: Given the following balance sheet data of an organization, find its net worth by using net worth formula.
| Assets | Liabilities | ||
| Cash and cash-equivalents | $ 4,500,000 | Accounts payable | $ 3,700,000 |
| Short term marketable securities | $ 2,000,000 | Accrued Expenses | $ 2,300,000 |
| Accounts Receivable | $ 1,700,000 | Deferred Revenue | $ 800,000 |
| Inventories | $ 1,200,000 | Commercial Paper | $ 1,400,000 |
| Vendor non-trade receivables | $ 500,000 | Long-term debt | $ 9,500,000 |
| Other current assets | $ 6,300,000 | Other non-current liabilities | $ 4,100,000 |
| Long term marketable securities | $ 1,700,000 | ||
| Property, plant and equipment | $ 10,000,000 | ||
| Other non-current assets | $ 2,300,000 | ||
Solution
Total assets value = 4,500,000 + 2,000,000 + 1,700,000 + 1,200,000 + 500,000 + 6,300,000 + 1,700,000 + 15,000,000 + 2,300,000 = $ 35,200,000
Total liabilities = 3,700,000 + 2,300,000 + 800,000 + 1,400,000 + 9,500,000 + 4,100,000 = $ 21,800,000
Using the net worth formula,
Net worth = Assets - Liabilities = 35,200,000 - 21,800,000 = $ 13,400,000
Therefore, the organization's net worth = $ 13,400,000
Example 3: If the net worth of an organization is $34,120,000 and the total asset owned by the organization is $67,890,000, using the net worth formula determine the financial growth of the organization.
Solution:
Total asset = $67,890,000
Total net worth = $34,120,000
Using the net worth formula, let's find the total liability,
Net worth = Assets - Liabilities
34120000 = 67890000 - Liabilities
Liabilities = 33770000
Therefore, the total liability of the organization is $33,770,000
This is a positive value and hence the financial growth is stable.
FAQs on Net Worth Formula
What is Meant by Net Worth Formula?
The net worth formula helps in calculating equity in terms of business. It can be used at various levels such as personal, group, organization, government, or to entire cities/countries. Net worth in the business of an organization describes the financial health of the organization, it is equal to the difference between the value of all its assets and all its liabilities which can easily be found out using the formula for net worth. the formula for calculating the net worth is Net worth = Assets - Liabilities
What is the Formula to Calculate the Net Worth Formula?
The formula to calculate the net worth of a company is by determining the total number of assets and the total number of liabilities owned by the company. The difference between the asset and the liability gives us the total net worth. Hence, the formula is:
Net worth = Assets - Liabilities
What are the Steps to Derive the Net Worth Formula?
There are three simple steps required while using the net worth formula. They are:
- Step 1: Calculate the total number of assets of the company from the balance sheet
- Step 2: Calculate the total number of liabilities of the company from the balance sheet
- Step 3: Once the total assets and total liabilities are determined, then use the net worth formula to determine the net worth and the financial growth.
Using the Net Worth Formula, Calculate the Net Worth of OnePlus Co. with Total Liability as $26,890,000 and Total Asset as $69,842,000.
Total asset = $69,842,000
Total liability = $26,890,000
Using the net worth formula, let's find the total liabilities,
Net worth = Assets - Liabilities
Net Worth = 69,842,000 - 26,890,000
Net Worth = 42,952,000
Therefore, the net worth of OnePlus Co. is $42,952,000
visual curriculum