Net worth is the value of all the non-financial and financial

asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

s owned by an individual or institution minus the value of all its outstanding liabilities. 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.

By entity

Calculation

Net worth is the excess of assets over liabilities. The assets that contribute to net worth can include homes, vehicles, various types of bank accounts,

money market account A money market account (MMA) or money market deposit account (MMDA) is a deposit account that pays interest based on current interest rates in the money markets. The interest rates paid are generally higher than those of savings accounts and tra ...

s, stocks and bonds. The liabilities are financial obligations such as loans,

mortgages A mortgage loan or simply mortgage (), in civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pur ...

, and

accounts payable 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 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 Carry or carrying may refer to: People *Carry (name) Finance * Carried interest (or carry), the share of profits in an investment fund paid to the fund manager * Carry (investment), a financial term: the carry of an asset is the gain or cost of h ...

which is the value as expressed on the

financial statements 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

balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...

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 Market value or OMV (open market valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or '' fair market value'', although t ...

of a firm; a firm may be worth more (or less) if sold as a

going concern A going concern is an accounting term for a business that is assumed will meet its financial obligations when they become due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the n ...

, or indeed if the business closes down. 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.

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 are 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 In common law jurisdictions, 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, in the absence of a legal will, the e ...

. Individuals with considerable net worth are described in the financial services industry as high-net-worth individuals and ultra high-net-worth individuals. In

personal finance Personal finance is the financial management that an individual or a family unit performs to budget, save, and spend monetary resources in a controlled manner, taking into account various financial risks and future life events. When planni ...

, 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.

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. 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 that country, plus the government's net worth. 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).

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 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 elderly or incapable of doing their j ...

References

External links

{{Wikidata property , P2218
Net Worth Calculator
Personal finance Balance sheet