What are Net Assets?
The net asset on the balance sheet is defined as the amount by which your total assets exceed your total liabilities and is calculated by simply adding what you own (assets) and subtract it from whatever you owe (liabilities). It is commonly known as net worth (NW)Net Worth (NW)The company's net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company's share capital (both equity and preference) as well as reserves and surplus..
Below is the Net asset FormulaThe Net Asset FormulaThe net asset formula evaluates the company's total assets surplus or deficit over its total liabilities. It determines the company's net worth or value which is an indicator of its financial health.
Let us calculate this for Colgate in 2014.
- Total Assets in 2014 (Colgate) = $13,459 million
- Total Liabilites in 2014 (Colgate) = $12,074 million
Net Assets = Total Assets in 2014 – Total Liabilities in 2014
= $13,459 million – $12,074 million = $1,385 million
Net Assets Example
Your Balance Sheet (the positional statement) is equally balanced between assets and liabilities.
- From the above basic account format of the balance sheetFormat Of The Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company., we can observe that the balance sheet is divided into Assets and Liabilities and Shareholders EquityShareholders EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting period..
- Now, if every item of the balance sheet is correctly listed, then the Total Assets must be equal to the Total of Liability and Share holder’s Equities.
- Remember, our Net Worth is equal to the difference between Total Assets and Total Liabilities. This leaves us with the Shareholders Equity.
- So we can say that It is actually similar to Shareholder’s Equity.
Increasing Net Assets Example
Amazon’s Assets has been increasing continuously over the past 5 year period. This is because they have been able to increase their Assets and earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments. over a period of time.
Decreasing Net Assets Example
Sears Holding, however, is a classic example of the decrease in Assets over a period of time. Sears has been reporting continuous losses resulting in the negative book value of the firm.
Net Assets for Individuals
Recently, Chris Larsen (co-founder) of cryptocurrency company Ripple has become the fifth wealthiest person in terms of net worth. Now that we understand what net worth to the company is, let us calculate it in the case of an individual.
From an individual’s perspective, net assetsNet AssetsNet Fixed Assets is a financial metric used to calculate the overall value of a firm’s fixed assets. You can calculate it by deducting the total depreciation or liabilities from the total amount paid for all the fixed assets. mean the difference between how much a person owns and how much she owes. That means, to improve your financial health, your assets must be positively high.
Remember, your earnings do not reflect your true financial health. Let’s take an example of two different people to make it clears.
- Ram earns Rs 45000/- per month while its expenses and liabilities (like monthly bills, installment of home loan/car loan, credit card liabilities, etc. total a sum of Rs 47000/-). The financial health of Ram is said to be poor, as his Net worth is negative, and nothing is left to invest.
- On the other hand, Shyam earns Rs 18000/- per month only He acquires zero liability and invests most of its income in assets like mutual funds Financial situation of Shyam, with no doubt is healthier than that of Ram’s
So from the above example, it becomes clear that:
- Your financial health is mainly decided by what net worth you own.
- Earnings are important just to use your earned money to make more money.
- Investment in assets helps secure your net worths.
Net assets are a simple way to identify the health of the company as well as an individual. If your company earnings are increasing, but your assets are also decreasing, your company’s health might not be improving.
This has been a guide to Net Assets and its definition. Here we discuss examples of Net Assets for a company and an individual along with a detailed explanation. You can learn more about accounting from the following articles –