The net worth of a corporation is described as the book value of its owner’s equity.
In any corporation there are different kind of financial reports are generated for internal and external purposes.
Some reports are general and only target one head on account while some reports are generic in nature and contain information about a group of transactions.
The Internal Accounting Standard Board has make it necessary to make 4 type of financial statements at the end of every year.
These statements present a summarize form for different activities. The main financial statements are:
- Balance Sheet
- Income Statement
- Cash Flow statement
- Owners’ Equity
Each statement is prepared for a specific reason. Like the balance is presenting the overall worth of the corporation and income statement summarize and net the overall corporation revenue and expenses.
The cash flow is the inflow and out flow of the company cash while owners’ equity statement is prepared to give the information about the dividend, reserves and profit distribution.
Where to Identify Net Worth of the Corporation in Financial Statements?
The net worth of the company is described as the net of assets and liabilities of the corporation.
So to identify the net worth we should have information about the total assets and total liabilities of the corporation. Both of these things can be found under the head of balance sheet.
Balance sheet represent the information about the net assets, liabilities and share holder equity. By using the following formula, we can easily identify the net worth of the organization.
Net worth = Total Assets – Total Liabilities
If you see the balance sheet you will find the third thing called owners’ equity.
This is the difference between the organization assets and liabilities. The important thing is for net worth we will use the book value of all the assets because there may be a situation where the company acquires its assets long time ago and now its values increase or decrease due to depreciation.
So we will use assets value – depreciation value for this calculation.
From the following balance sheet compute, the net worth of the corporation.
So the formula will be Net Worth = Total Assets = Total Assets – Total Liabilities
= 562376 – 391395
= 170981 Net Worth.
How to calculate net worth of a corporation?
Subtract the total liabilities from the total assets to get the net worth of the business. In this example, this small business has $120888 in assets and $65000 in liabilities. Subtracting $65000 from 120888 equals $55888. The net worth for this business is $55888.
Nowadays the negative worth of organization should not take as a surprise because if the business is still young it may have more liabilities than asset. So do not take it as a negative thing in some situation.
But yes if the business is running from a long time and now it shows decline in its net worth than this is an alarming situation. Because at the end there it will cost the corporation to handle with some hard things.