Calculation Net worth is the excess of assets over liabilities. The assets that contribute to net worth can include homes, vehicles, various types of bank accounts,
money market accounts, stocks and bonds. The liabilities are financial obligations such as loans,
mortgages, and
accounts payable (AP) that deplete resources.
Companies Net worth in business is also referred to as
equity. It is generally based on the value of all assets and liabilities at the
carrying value which is the value as expressed on the
financial statements. To the extent items on the
balance sheet do not express their true (market) value, the net worth will also be inaccurate. On reading the balance sheet, if the accumulated losses exceed the shareholder's equity, net worth becomes negative. Net worth in this formulation does
not express the
market value of a firm; a firm may be worth more (or less) if sold as a
going concern, or indeed if the business closes down. Net worth vs. debt is a significant aspect of business loans. Business owners are required to "trade on equity" in order to further increase their net worth.
Individuals For individuals, net worth or wealth refers to an individual's net economic position: the value of the individual's assets minus liabilities. Examples of assets that an individual would factor into their net worth are retirement accounts, other investments, home(s), and vehicles. Liabilities include both secured debt (such as a home mortgage) and unsecured debt (such as consumer debt or personal loans). Typically intangible assets such as educational degrees are not factored into net worth, even though such assets positively contribute to one's overall financial position. When calculating personal net worth for purposes of identifying assets that are available to provide income, especially retirement income, some
personal finance experts recommend not including the
home equity of the person's
primary residence. For a deceased individual, net worth can be used for the value of their
estate when in
probate. Individuals with considerable net worth are described in the financial services industry as
high-net-worth individuals and
ultra high-net-worth individuals. In
personal finance, knowing an individual's net worth can be important to understand their current financial standing and give a reference point for measuring future financial progress.
Governments Balance sheets that include all assets and liabilities can also be constructed for governments. Compared with government debt, a government's net worth is an alternative measure of the government's financial strength. Most governments utilize an accrual-based accounting system in order to provide a transparent picture of government operational costs. Other governments may utilize cash accounting in order to better foresee future fiscal events. The accrual-based system is more effective, however, when dealing with the overall transparency of a government's spending. Massive governmental organizations rely on consistent and effective accounting in order to identify total net worth.
Countries A country's net worth is calculated as the sum of the net worth of all companies and individuals resident in that country, plus the government's net worth. For the United States, this measure is referred to as the
financial position, and totalled $123.8 trillion as of 2014.
Importance Net worth is a representation of where one stands financially. This can be used to help create budgets, influence wise spending, motivate one to pay off debt, and it can motivate someone to save and invest. Net worth is also important to look at when considering
retirement. ==See also==