The net worth of a business may be referred to as the book value or owners’ equity of the company. The net worth of a company indicates the amount of equity owners have in a business. A company’s balance sheet provides all the necessary financial information to calculate a company’s net worth. Knowledge of the accounting equation, which states that assets equal liabilities plus owners’ equity, makes it relatively easy to calculate the net worth of a company.
Identify all assets that the company will convert to cash within a one-year period. Add current assets, like cash, and accounts receivable. The total indicates a company’s total current assets. For example, a company with $17,000 cash, $24,000 accounts receivable, $4,500 prepaid rent and $30,000 in inventory has total current assets of $75,500.
Calculate all assets that the company will convert to cash in over one year. A company may hold long-term assets, like real estate, equipment, computers and land. Other long-term assets may include patents, vehicles, furniture and copyrights. A business with $150,000 land, $13,500 computers, $25,000 equipment and $320,000 real estate holdings has $508,500 total long-term assets.
Add current assets and long-term assets. The result will yield a company’s total assets, which are the company’s resources of future economic value. Assuming that current assets equal $75,500 and long-term assets equal $508,500 the business will have $584,000 total assets.
Verify the company’s liabilities that will become due within one year. Examples of current liabilities include accounts payable, wages payable, interest payable and notes payable within one year. A company with $28,000 wages payable, $12,000 interest payable and $96,000 accounts payable has current liabilities of $136,000.
Confirm the liabilities that must be paid in over one year. Long-term liabilities include notes payable in over one year, mortgages payable, bonds payable and leases. A company with $89,000 mortgages payable, $60,000 lease payable on equipment, $107,000 notes payable and $40,000 bonds payable has total long-term liabilities of $296,000.
Compute total liabilities by adding current liabilities with long-term liabilities. Assuming a company has current liabilities of $136,000 and long-term liabilities of $296,000 the total liabilities equal $432,000. This number indicates the total obligations the company has due to creditors, lenders and suppliers.
Subtract a company’s total liabilities from total assets to determine the net worth of the business. A company with total assets of $584,000 and liabilities totaling $432,000 has a net worth equal to $152,000.
Items you will need
- Balance sheet