Net worth is termed as the book value or its owner’s capital in the company. The net worth of the company is the balance of all assets value subtracting the amount of liabilities where we could find on the balance sheet.
Financial statements are prepared to inform the company’s stakeholders about the performance and worth of the business.
The International Accounting Bodies made rules and regulations to keep records of every financial transaction.
And proposed 4 types of reports which are mandatory for every company to prepare and publish.
These reports are prepared at the end of every financial year. They include
- Balance sheet
- Income statement
- Cash flow statement
- Changes in Owners’ Equity
Another compulsory part of the financial statement is termed notes to the accounts.
The company accounting policy and calculations are provided in the notes so the reader will have a good idea about the basis of calculation.
Purpose of Financial Statement:
The purpose of financial statements is to provide information to the company stakeholders. So that they can make their strategies for the future.
Every financial report has a specific purpose. Like income, statements show the company’s net income for the period. In other words, it sums up the total revenue and total expenses of the business.
The cash flow is prepared to show the sum of total cash transactions and the availability of cash for the business.
The changes in owner’s equity are for the shareholders which gives information about the total net investment of the shareholders.
New investors can use this information to determine the dividend and other policies for the shareholders.
Net Worth of the Company:
And if you want to calculate the net worth of the company, then you have to look at the balance sheet. You can easily estimate the net worth by the following formula:
Net Worth = Total Assets – Total Liabilities
But if you calculate negative net worth for a company that is stable for a long time, then there is some danger and management has to look for some solution.
Nowadays with the growing businesses and new strategies if you found a negative balance of net worth, then do not be surprised because maybe it is a new business or it is the strategy of the management.
Example 1:
Calculate the net worth of the company from the following balance sheet.
So the formula will be Net Worth = Total Assets = Total Assets – Total Liabilities
= 823376 – 591395
= 231981 Net Worth.
Example 2:
How to calculate the net worth of a Company?
Small business has $1,120,888 in assets and $165,000 in liabilities. Subtracting $165,000 from $1120,888 equals $955,888. The, net worth for this business is $955,888.
The information about the net worth of a company is important for every owner of the business. So that he will have an idea of what he has.
And he can compare these calculations from time to time to identify whether the changes the positive or negative. The net worth calculation is important for all types of business.
It does not necessary if your organization is big or small, this statement is useful for all the companies.
