Net worth is the value of all the non-financial and financial
In financial accounting
Financial accounting is the field of accounting
Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
s owned by an individual or institution minus the value of all its outstanding liabilities. Since financial assets minus outstanding liabilities equal net financial assets, net worth can also be conveniently expressed as non-financial assets plus net financial assets. It can apply to companies, individuals, governments or economic sectors such as the sector of financial corporations or to entire countries.
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. The liabilities are financial obligations such as loans,
A mortgage loan or simply mortgage () is a loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a ...
Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company's balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents.
An accounts ...
(AP) that deplete resources.
Net worth in business is also referred to as
Equity may refer to:
Finance, accounting and ownership
*Equity (finance), ownership of assets that have liabilities attached to them
** Stock, equity based on original contributions of cash or other value to a business
** Home equity, the differe ...
. It is generally based on the value of all assets and liabilities at the
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. Trad ...
which is the value as expressed on the
Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.
Relevant financial information is presented in a structured manner and in a form which is easy to un ...
. To the extent items on the
In financial accounting
Financial accounting is the field of accounting
Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such ...
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 or OMV (Open Market Valuation) is the price at which an asset would trade in a Market (economics), competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market va ...
of a firm; a firm may be worth more (or less) if sold with a
going concernA going concern is a business
Business is the activity of making one's living or making money by producing or buying and selling Product (business), products (such as goods and services). Simply put, it is "any activity or enterprise entered int ...
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.
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 or The Estate may refer to:
* Estate (law), a term in common law for a person's property, entitlements and obligations
* Estates of the realm, a broad social category in the histories of certain countries.
** The Estates, representative ...
Probate is the judicial process whereby a will is "proved" in a court of law and accepted as a valid public document that is the true last testament of the deceased, or whereby the estate is settled according to the laws of intestacy
Individuals with considerable net worth are described in the financial services industry as
High-net-worth individual (HNWI) is a term used by some segments of the financial services industry to designate persons whose investible wealth (assets such as stocks and bond (finance), bonds) exceed a given amount. Typically, these individuals ...
ultra high-net-worth individual
Ultra-high-net-worth individuals (UHNWI) are defined as having a net worth
Net worth is the value of all the non-financial and financial asset
In financial accountancy, financial accounting, an asset is any resource owned or controlled by a b ...
Personal finance is the financial management
Financial management may be defined as the area or function in an organization which is concerned with profitability, expenses, cash and credit, so that the "organization may have the means to car ...
, 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.
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.
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.
[Federal Reserve . "Z.1 Financial Accounts of the United States - Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts - First Quarter 2014" (PDF).]
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 is the withdrawal from one's position or occupation or from one's active working life. A person may also semi-retire by reducing work hours or workload.
Many people choose to retire when they are old or incapable of doing their job d ...
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