a. How is net worth calculated? b. What is the meaning of the statement that your...

a. How is net worth calculated?

b. What is the meaning of the statement that your net worth is the equity you have in your own life?

Solutions

Expert Solution

Part (a)

Net worth = Total assets you own - Total liabilities you owe

Thus, net worth is your worth left after taking care of all your liabilities. It's something like, if all the assets you own are liquidated (sold) and you use the proceeds to pay all the money you are supposed to (debt, short term debt, mortgage, pending payments), then whatever you are left with, is the net worth.

The concept remains same, but it get's calculated in different manner in case of different entities:

For individual, it's: Total assets (bank balance, car, vehicle, house, investments etc) - Debt - Credit card - any other outstanding
For corporate, it's = Current assets + Fixed assets - current liabilities - long term debt

Part (b)

Assets = Equity + Liabilitity

Hence, Equity = Assets - Liability.

This is also the calculation of Net worth.

Thus, net worth is nothing but your own equity. It's the amount you are left with in your life.

jeff jeffy answered 5 months ago

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