Net worth

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Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. [1] Financial assets minus outstanding liabilities equal net financial assets, so net worth can be expressed as the sum of non-financial assets and net financial assets. This concept can apply to companies, individuals, governments, or economic sectors such as the financial corporations sector, or even entire countries. [2]

By entity

Calculation

Net worth is a combination of financial assets and liabilities. The financial assets that contribute to net worth are homes, vehicles, various types of bank accounts, money market accounts, and stocks and bonds. [3] The liabilities are financial obligations such as loans, mortgage, 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 with a going concern.

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. [4]

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 include 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.

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. [5]

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. [6]

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. [7] 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 this country, plus the government's net worth. As for the United States, this measure is referred to as the financial position, and totalled \$123.8 trillion as of 2014. [8]

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.

Related Research Articles

In finance, equity is an ownership interest in property that may be offset by debts or other liabilities. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets owned. For example, if someone owns a car worth \$24,000 and owes \$10,000 on the loan used to buy the car, the difference of \$14,000 is equity. Equity can apply to a single asset, such as a car or house, or to an entire business. A business that needs to start up or expand its operations can sell its equity in order to raise cash that does not have to be repaid on a set schedule.

In financial accounting, a balance sheet is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business partnership, a corporation, private limited company or other organization such as government or not-for-profit entity. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". It is the summary of each and every financial statement of an organization

In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. Traditionally, a company's book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both. The value inherent in its workforce, part of the intellectual capital of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to be tangible book value.

Debits and credits in double-entry bookkeeping are entries made in account ledgers to record changes in value resulting from business transactions. A debit entry in an account represents a transfer of value to that account, and a credit entry represents a transfer from the account. Each transaction transfers value from credited accounts to debited accounts. For example, a tenant who writes a rent cheque to a landlord would enter a credit for the bank account on which the cheque is drawn, and a debit in a rent expense account. Similarly, the landlord would enter a credit in the rent income account associated with the tenant and a debit for the bank account where the cheque is deposited.

Personal finance is the financial management which an individual or a family unit performs to budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.

Financial accounting is a branch of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes.

Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Gross working capital is equal to current assets. Working capital is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit and negative working capital.

In finance, leverage is any technique involving borrowing funds to buy things, hoping that future profits will be many times more than the cost of borrowing. This technique is named after a lever in physics, which amplifies a small input force into a greater output force, because successful leverage amplifies the comparatively small amount of money needed for borrowing into large amounts of profit. However, the technique also involves the high risk of not being able to pay back a large loan. Normally, a lender will set a limit on how much risk it is prepared to take and will set a limit on how much leverage it will permit, and would require the acquired asset to be provided as collateral security for the loan.

The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. Closely related to leveraging, the ratio is also known as risk, gearing or leverage. The two components are often taken from the firm's balance sheet or statement of financial position, but the ratio may also be calculated using market values for both, if the company's debt and equity are publicly traded, or using a combination of book value for debt and market value for equity financially.

A chart of accounts (COA) is a list of financial accounts set up, usually by an accountant, for an organization, and available for use by the bookkeeper for recording transactions in the organization's general ledger. Accounts may be added to the chart of accounts as needed; they would not generally be removed, especially if any transaction had been posted to the account or if there is a non-zero balance.

The fundamental accounting equation, also called the balance sheet equation, represents the relationship between the assets, liabilities, and owner's equity of a person or business. It is the foundation for the double-entry bookkeeping system. For each transaction, the total debits equal the total credits. It can be expressed as furthermore:

Flow of funds accounts are a system of interrelated balance sheets for a nation, calculated periodically. There are two types of balance sheets: those showing

In accounting, finance and economics, an accounting identity is an equality that must be true regardless of the value of its variables, or a statement that by definition must be true. Where an accounting identity applies, any deviation from numerical equality signifies an error in formulation, calculation or measurement.

In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything that can be used to produce positive economic value. Assets represent value of ownership that can be converted into cash . The balance sheet of a firm records the monetary value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business.

This article provides background information regarding the subprime mortgage crisis. It discusses subprime lending, foreclosures, risk types, and mechanisms through which various entities involved were affected by the crisis.

The financial position of the United States includes assets of at least \$269.6 trillion and debts of \$145.8 trillion to produce a net worth of at least \$123.8 trillion as of Q1 2014.

Net operating assets (NOA) are a business's operating assets minus its operating liabilities. NOA is calculated by reformatting the balance sheet so that operating activities are separated from financing activities. This is done so that the operating performance of the business can be isolated and valued independently of the financing performance. Management is usually not responsible for creating value through financing activities unless the company is in the finance industry, therefore reformatting the balance sheet allows investors to value just the operating activities and hence get a more accurate valuation of the company. One school of thought is that there is no such security as an operating liability. All liabilities are a form of invested capital, and are discretionary, so the concept of net operating assets has no basis because operating assets are not discretionary.

A balance sheet recession is a type of economic recession that occurs when high levels of private sector debt cause individuals or companies to collectively focus on saving by paying down debt rather than spending or investing, causing economic growth to slow or decline. The term is attributed to economist Richard Koo and is related to the debt deflation concept described by economist Irving Fisher. Recent examples include Japan's recession that began in 1990 and the U.S. recession of 2007-2009.

A Public Sector Balance Sheet, like a balance sheet in the corporate world, reports comprehensively on what a government owns and owes, as well as its own capital. As such, it is a critical element of a system of Public Financial Management. A balance sheet, or statement of financial position, recognises and discloses the assets, liabilities, and net worth at a given point in time, for a government entity, a government or the whole public sector. An important metric for the fiscal position of the whole public sector is public sector net worth.

References

1. System of National Accounts 2008, published by the European Commission, the International Monetary Fund, the Organisation for Economic Co-operation and Development, the United Nations, and the World Bank, p. 49, section 3.109.
2. Ron Lieber (May 12, 2010). "Net-Worth Obsession". The New York Times.
3. Radner, Daniel B. (March 1989). "Net Worth And Financial Assets Of Age Groups In 1984". Social Security Bulletin. 52 (3): 2–15. PMID   2711292.
4. Hardy, C.O. (1925). "The Ration of Net Worth to Debt". The University Journal of Business. 4 (1): 38–46. doi:10.1086/506818. JSTOR   2354605.
5. Ray Hutton (5 November 2006). "Rich spurn ultra-luxury cars". UK: The Sunday Times. Archived from the original on February 22, 2014. Retrieved 10 September 2013.
6. "Your Personal Net Worth". schwabmoneywise.com. 2020. Retrieved 10 April 2020.
7. Shead, Bob (1999). "Measuring Governments' Net Worth". Agenda: A Journal of Policy Analysis and Reform. 6 (4): 339–350. JSTOR   43199050.
8. Federal Reserve . "Z.1 Financial Accounts of the United States - Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts - First Quarter 2014" (PDF).