Net wealth can be calculated by subtracting liabilities from the total value of assets owned by a person or company.
Also known as equity, equity is the total value of assets owned by an individual, business, or other type of organization, less any current liabilities. The goal of most companies and households is to generate positive net wealth, which means that the total value of assets exceeds the total value of debt that is owed. There are some minor differences in how net worth or wealth is recorded in various environments, although the basic formula applies to individuals and business entities.
To calculate equity, it is first necessary to determine the value of 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 individuals, the value or value of assets is recorded directly as this current market value. For companies, the asset is typically listed as the original cost of purchase, while also identifying the amount of accumulated depreciation on that asset since the purchase took place.
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 company. For families, this usually means any outstanding credit card debt, the balance of auto loans and mortgages, and any bills or slips that are currently running at local stores. Companies would also include any outstanding balances owed on real estate, equipment or any accounts receivable that have been declared incorrigible but are still reflected in the company’s accounting records and have not been written off as a bad debt.
Once you have determined the amount of assets and liabilities associated with the individual or company, 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 wealth typically involves the dual process of refraining from taking on additional debt while paying off current debts, and looking for ways to increase the value of assets at the same time. For example, if a family currently has a net worth of $50,000 US Dollars (USD) that reflects $10,000 in credit card debt, paying off the credit card balances and choosing not to make additional purchases will result in the net worth increasing. of that family to $60,000 USD. Assuming the family owns shares in one more company that generates $5,000 USD in dividends during the same period, equity increases from the original value of $50,000 USD to $65,000 USD.