A company's net worth is determined by subtracting its liabilities from its assets.
The net worth of a business represents its equity and value. When you run a business, understanding what your company is worth is crucial to measuring the success and progress of your operations. There are several components that contribute to calculating net worth, as it is a measure of the entire operation. An equation for describing this is typically represented as "assets minus liabilities equal net worth."
Assets
Assets are things such as cash, receivables, inventory and intellectual property, as well as other sources of financial value for the business. Determine the total value of the company's assets as the first step in calculating the net worth. Add the total of all of the asset accounts to determine the total assets. For example, $205,000 in cash, $14,959 in receivables and $18,000 in intellectual property nets a total asset value of $237,959.
Liabilities
The total liabilities are a contributing factor to calculating net worth. Liabilities reduce the value of a company's assets, because they would have to be settled if the company liquidated. Liabilities include short-term and long-term loans, accounts payable and any other monies owed to other people or corporations. For example, if your payable account shows $25,000 outstanding and $10,000 remaining on a loan balance, that's $35,000 in total liabilities.
Net Worth or Equity
The difference between the company's assets and liabilities represents the net worth of the company. The equation is represented as "assets minus liabilities equal net worth." Calculate the net worth of your company by subtracting your total liabilities from the total value of assets. For example, if you have $35,000 in total liabilities and an asset value of $237,959, your total net worth is 237,959 minus 35,000, or $202,959.
Financial Statements
The balance sheet statement reflects the net worth of a company in this manner. The assets, liabilities and equity are recorded based on the values as of the date of the statement. The final balance is recorded as "owners' equity" or "net worth" if the company is privately owned. For companies with shareholders, it is recorded as "stockholders' equity" or "shareholders' equity."
