Legal Definitions - net worth

Net worth is a financial metric that represents the total value of an individual, company, or other entity. It is calculated by subtracting all liabilities (what is owed) from all assets (what is owned).

In simpler terms, net worth provides a snapshot of an entity's financial health at a specific point in time. A positive net worth indicates that assets exceed liabilities, while a negative net worth means liabilities are greater than assets.

• Example 1: An Individual's Financial Standing

  Consider Sarah, who is planning for retirement and wants to understand her current financial position. To calculate her net worth, she lists her assets: her savings account balance ($50,000), the current market value of her home ($300,000), and her retirement investments ($250,000). She then lists her liabilities: her outstanding mortgage balance ($150,000) and a car loan ($10,000).

  Sarah's total assets are $50,000 + $300,000 + $250,000 = $600,000. Her total liabilities are $150,000 + $10,000 = $160,000. Therefore, Sarah's net worth is $600,000 - $160,000 = $440,000. This figure helps her track her financial progress towards retirement and assess her overall wealth.

• Example 2: A Small Business's Health

  Imagine "Bright Ideas Marketing," a small business owned by David, which is seeking a line of credit from a bank. The bank will assess the company's net worth to determine its financial stability. The business's assets include cash in its bank accounts ($30,000), the value of its office equipment and computers ($20,000), and accounts receivable (money owed to the business by clients for services rendered) ($15,000). The company's liabilities include a small business loan ($10,000) and accounts payable (money owed to suppliers for services received) ($5,000).

  Bright Ideas Marketing's total assets are $30,000 + $20,000 + $15,000 = $65,000. Its total liabilities are $10,000 + $5,000 = $15,000. The company's net worth is $65,000 - $15,000 = $50,000. This positive net worth demonstrates to the bank that the business has a healthy financial foundation, with more resources than debts, making it a more attractive candidate for a loan.