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).
Below is the Net asset Formula
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 sheet, we can observe that the balance sheet is divided into Assets and Liabilities and Shareholders Equity
- 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 earnings 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 negative book value of the firm.
Net Assets for Individuals
Recently, Chris Larsen (co-founder) of cryptocurrency company Ripple has become a fifth wealthiest person in terms of net worth. Now that we understand what is net worth to the company, let us look at how it can be calculated in case of an individual.
source: fortune.com
From an individual’s perspective, net 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
Conclusion
Net assets is 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.
Recommended Articles
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 detailed explanation. You can learn more about accounting from the following articles –
