Net wealth can be calculated by subtracting liabilities from the total value of assets owned by a person or business.
Also known as equity, equity is the total value of assets owned by a person, business, or other type of organization, minus any current liabilities. The goal of most businesses and households is to build positive net worth, meaning that the total value of assets exceeds the total value of debt owed. There are some minor differences in the way net worth or wealth is recorded in various settings, although the basic formula applies to individuals and corporations.
To calculate equity, it is first necessary to determine the value of the assets owned by the entity. In many cases, this means considering the current market value of the assets in question, taking into account factors such as depreciation. In the personal accounting records of natural persons, the value or value of the assets is recorded directly as this current market value. For businesses, the asset is usually listed as the original purchase cost, while also identifying the amount of accumulated depreciation on that asset since the purchase was made.
Once the value of all assets has been determined, the next step is to identify the total amount of obligations currently owed by the individual or business. For families, this usually means any outstanding credit card debt, the balance of car loans and mortgages, and any bills or vouchers currently running up at local stores. Businesses would also include any outstanding balance due on real estate, equipment, or any accounts receivable that has been declared uncorrectable but is still reflected in the business’s accounting records and has not been written off as a bad debt.
Once you have determined the amount of assets and liabilities associated with the individual or business, calculating net worth is very simple. By subtracting total liabilities from total assets, it is possible to identify the current level of equity held by that entity. Ideally, total assets are greater than total liabilities, indicating that net worth or wealth is positive. In the event that total liabilities are greater than total assets, the entity’s equity or equity is considered negative.
Increasing net worth typically involves the dual process of refraining from taking on additional debt while paying off current debts and looking for ways to increase asset value at the same time. For example, if a family currently has a net worth of $50,000 United States Dollars (USD) reflecting $10,000 in credit card debt, paying off credit card balances and opting out of additional purchases will result in an increase in net worth of that family. at $60,000 USD. Assuming the family owns shares in one more company that earns $5,000 USD in dividends during the same period, the equity increases from the original value of $50,000 USD to $65,000 USD.