Net worth is the amount of assets a business holds less all outstanding obligations. You can calculate net worth by subtracting total assets from total liabilities, or you can look at the net worth section of the balance sheet. Net worth may be labeled as net assets, stockholders' equity or partner capital, depending on the type of business.
The first section of the balance sheet contains company total assets. Assets can be long-term or current. Current assets are used up or converted to cash within a year, whereas long-term assets last more than a year. Cash, savings, accounts receivable and inventory are currents assets, and real estate, buildings, land and equipment are long-term assets. The asset section may also include intangible assets, like patents, trademarks and goodwill.
Below assets on the balance sheet is a section for total liabilities. Just like assets, liabilities can be short-term or long-term. Short-term liabilities are amounts that the company expects to pay back within a year, like accounts payable, wages payable and short-term notes payable. Long-term liabilities, like long-term loans and bonds payable, are amounts due in more than a year. If the company holds long-term liabilities, it usually breaks out the portion it expects to pay during the current year and labels it as short-term portion of long-term debt.
Calculating and Identifying Net Worth
You must subtract total assets from total liabilities to find business net worth, which can be identified by a variety of terms. Companies that don't have stockholders but issue balance sheets, like nonprofits and employee benefit plans, label net worth as net assets. Companies with stockholders label net worth as stockholders' equity, and partnerships use partners' capital. The total amount of net assets, equity or capital listed equals net worth.
Components of Net Worth
If net worth is labeled as equity or capital, the amount is usually further divided into several categories. Corporations divide stockholders' equity into common stock, additional paid-in capital, retained earnings and treasury stock. Common stock and additional paid-in capital represent the amount of money that owners paid to purchase stock. Treasury stock is stock that the company has repurchased or has yet to issue. Retained earnings is the amount of cash left to reinvest in the business or to pay out as dividends.
Partnerships don't typically break out components like retained earnings or treasury stock. Instead, they note how much equity belongs to each partner. For example, a partnership capital account may list that Partner A has $10,000 of capital, Partner B has $20,000 of capital, and that the total capital -- or net worth -- of the business is $30,000.