Net worth in personal finance is what is left after taxes are taken out.
Net worth is a term commonly used in business accounting, although it is sometimes borrowed from personal finance professionals. It is often used interchangeably with net income. The definition of personal finance refers to the income left over after taxes are deducted, often referred to as take-home pay. The accounting definition is a bit more complex and refers to a company’s profit after deducting the cost of doing business and all other expenses, both tangible and intangible.
Accountants use the following formula to determine net worth: (sales revenue – cost of goods sold) – (operating expenses + interest paid + depreciation + taxes) . As you can see, it is what is left after subtracting everything that contributed to the production of the merchandise for sale. To fully understand what the value represents, it is best to look at what is deduced.
The first item subtracted from revenue is cost of goods sold, which is simply the gross cost of goods in stock. This is calculated by putting a value on the remaining stock at the merchant, figuring out how much is available on the statement date. Accountants calculate an average value for the inventory used in the period using the following formula: (Beginning inventory + Purchases) – Ending inventory. When the period cost of goods sold is subtracted from sales revenue, what is left is called gross profit or gross value. Operating expenses, interest paid, depreciation and taxes are deducted from gross profit.
Operating expenses refer to all production costs, from salaries to utilities. The interest paid is just that: any interest paid on loans made during the course of business. Depreciation is an accounting measure that aims to spread the cost of an asset over its useful life. This allows the cost of a capital asset to be broken down into smaller amounts over the period the asset is expected to be used, rather than writing off a large amount in one accounting period. Taxes are part of running a business and must be paid before an official profit is declared, which is why they are deducted here.
Once all deductions have been made from the income produced by the organization, the result is net worth or bottom line. Bottom line is often used as the bottom line is the last entry on the income statement, so this amount is considered pure profit because it is the excess income that remains after all other contributing factors are deducted. The number is as close as accountants come to announcing a true picture of any profit made by the company.