Net worth formula
The net worth calculation is done by the individual, firm, and many business organizations for computing their financial status and it is calculated by cutting off the liabilities from the assets owned by the person who is calculating the net worth. The formula for calculating the net worth is very simple.
NET WORTH= TOTAL ASSETS – TOTAL LIABILITIES
- The net worth calculation is done by every big organization as it tells them whether their company is making a profit or loss and it gives them an indication of whether they are making the right business-related decision or how much they have to increase their efficiency to reach their desired goal
- The net worth calculation is also necessary as a company having a good network creates a better name in their respective industry giving them many benefits as trust comes in the company resulting in the growth of the company
Steps of calculating the net worth.
The two main steps in calculating the net worth of a company are:
- Determining the total assets of the company
- Computing the total liabilities of the company
While calculating the assets of a company we take into consideration all the things related to the company which get a source of income such as rent receivable, land, office furniture, trade receivable, cash, bank deposits, interest on money, interest receivable, goodwill, inventory.
When we are calculating liabilities, we take into consideration all the payments or financial payments that the company has to make to some other company or individual. Some common examples of liabilities are tax payable, interest payable, short-term debts as well as accounts payable, bills payable, etc.
For example: For a given company whose net worth is $5888000 and the asset that the company owns is valued at $6410000. use the net worth formula to determine the liability of the company and comment on the company’s financial growth.
Total asset of the company = $6410000
Total net worth of the company = $5888000
With the help of the net worth, the formula finds the company’s liability
So the basic formula for the net worth calculation = total Assets – total Liabilities
5888000= 6410000 – Liabilities
Liabilities = 522000
Therefore, the total liability of the organization is $522000.
The value comes out to be positive indicating a financial growth of the company.