Definition

# What Is Net Worth? Formula & Types of Net Worth with Practical Example

## What Is Net Worth?

Net Worth is the book value of a company’s common stock, surplus, and retained earnings. It is the difference between a firm’s assets (what it owns or is owed) and its liabilities (what it owes) and it is also called equity capital. The formula below can help calculate the worth of any entity -

Net Worth = Assets - Liabilities

It may be necessary to define and classify liabilities so that this particular worth can be calculated accurately. Liabilities are various debts on the business level which include accrued expenses, accounts payable, deferred revenue, and on an individual level, it may include home and car loans, mortgages, student loans, credit card balances etc.

Types of Net Worth

There are two different spheres where it applies and it categorizes them variedly -

• In personal finance

## Practical Example

For example, if an individual’s assets include the residence worth \$300000, the total return on investment worth \$20000 and owned automobile valued at \$84000. On the other hand, his/her liabilities have a mortgage of \$200000, a car loan worth \$70000 and a student loan priced at a whopping \$680000.

So,

Net Worth = Assets - Liabilities

= (\$300,000 + \$20,000 + \$84,000) - (\$200,000 + \$70,000 +                                              \$680,000)

= \$404,000 - \$950,000

= -\$546,000

Here, the value is negative and this happens when the liabilities are worth higher than the assets.

Use of the Term in Sentences

• Without a very high net worth, businesses and individuals do not qualify for investing in hedge funds.

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