BANKING AND CREDIT TERMS
What is
NET
WORTH?
Net worth is a measure of wealth. Net worth is the sum of all assets owned by a person or a company, minus any obligations or liabilities.
Deeper definition
There are slightly differing methods for calculating the net worth of an individual and the net worth of a company. Both figures are the total of all assets minus all liabilities. For calculating individual net worth, the value of assets is based on their current market value rather than original purchase prices. For company net worth, the value of assets is based on their original purchase prices instead of their current market value.
For businesses, the value
of an asset is referred to as
its carrying value or open
market value. This is
understood as the price an asset
would get in a competitive auction.
Other concepts used interchangeably with carrying value are mark to market, fair value, and fair market value, although they can have different meanings depending on the context.
Negative net worth happens when the liabilities of a company or an individual exceed the assets held. This happens in one of two ways: either the liabilities increase over time as more debt is taken on, or assets owned decline in value.
Net worth example
Keep in mind that net worth is only a snapshot of how much wealth a person or company holds at any a single moment in time. Perhaps more important is whether the amount of wealth is increasing or declining. Student loan debt and mortgage debt decline as people get older, pay off loans, and gain more equity in their homes.
Companies are required to
calculate their net worth
on a regular basis,
according to accounting
standards, and that
amount can vary widely
depending on seasonality,
market cycles and a host
of other factors.
This infographic was designed by Avalaunch Media
NET
WORTH
SUM OF ASSETS
OBLIGATIONS
When an individual passes away, her net worth is equivalent to the value of her estate. In probate, any liabilities of the deceased are met, and the rest belongs to heirs. Any inheritance then becomes a part of the inheritor’s net worth.
