What is net worth?
There are slightly differing methods for calculating the net worth of an individual and the net worth of a company. Both figures are the total of all assets minus all liabilities. For calculating individual net worth, the value of assets is based on their current market value rather than original purchase prices. For company net worth, the value of assets is based on their original purchase prices instead of their current market value.
When an individual passes away, her net worth is equivalent to the value of her estate. In probate, any liabilities of the deceased are met, and the rest belongs to heirs. Any inheritance then becomes a part of the inheritor’s net worth.
For businesses, the value of an asset is referred to as its carrying value or open market value. This is understood as the price an asset would get in a competitive auction. Other concepts used interchangeably with carrying value are mark to market, fair value, and fair market value, although they can have different meanings depending on the context.
Negative net worth happens when the liabilities of a company or an individual exceed the assets held. This happens in one of two ways: either the liabilities increase over time as more debt is taken on, or assets owned decline in value.
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Net worth example
Keep in mind that net worth is only a snapshot of how much wealth a person or company holds at any a single moment in time. Perhaps more important is whether the amount of wealth is increasing or declining. Student loan debt and mortgage debt decline as people get older, pay off loans, and gain more equity in their homes. Companies are required to calculate their net worth on a regular basis, according to accounting standards, and that amount can vary widely depending on seasonality, market cycles and a host of other factors.