Shareholder Equity and Net Worth are two different terms which many times is used interchangeably to represent worth of a person left after paying all his liabilities but both having the slight difference between each other where shareholder’s equity have the definite meaning and is relevant when there are multiple owners in the company whereas the net worth is generic term which includes individual worth as well.
Differences Between Shareholder Equity vs Net Worth
When we talk about shareholder equity, we look at a company and more specifically a company’s balance sheet. There are three main components of a balance sheet – assets, liabilities, and shareholder equity.
The shareholder equity can also be expressed as the difference between the total assets and the total liabilities of the company. So, let’s say that a firm has total assets of $100,000 and the total liabilities of $70,000, the shareholder equity would be $30,000.
Now, the question is what shareholder equity includes? Shareholder equity consists of equity share capital, preference share capital (both the par value and the additional paid-in capital), retained earnings (earnings that are not paid out to the shareholders as dividends), etc.
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The reason we confuse the “net worth” with the “shareholder equity” is because even “net worth” can be calculated by deducting the total liabilities from the total assets.
But there is one slight difference between shareholder equity and net worth. When we talk about net worth, we mean individual entity and when we talk about shareholder equity, we mean to talk about a firm.
So, how would you understand the difference between shareholder equity and net worth? It turns out that there’s a way. We will look at it in the next section.
Shareholder Equity vs Net Worth Infographics
Below infographics details the differences between shareholders equity vs Net worth.
Key Differences Between Shareholder Equity vs Net Worth
Here are key differences between shareholder equity and net worth –
- Shareholder equity is a specific term that describes how much the owners have after paying off the total liabilities. On the other hand, net worth is a generic term that describes what a company/individual can keep after paying off its/his liabilities.
- When we talk about shareholder equity, there are owners other than the person who has founded the company. When we talk about net worth, there is only one person (or few) and there are no other owners claiming the money after paying off the debts.
- Shareholder equity can also be described as a sum-total of equity capital, preferred capital, retained earnings etc. Net worth, on the other hand, is the money one can keep or re-invest for building the business.
- Even if the concept of both of these is similar, it has a difference in the context. In terms of shareholder equity, we are looking at the difference between total assets and total liabilities as a capital for the company. On the other hand, in terms of net worth, we are looking at the difference that isn’t
Head to Head Differences Between Shareholder Equity vs Net Worth
Here are the top most differences between shareholder equity and net worth –
|The basis for Comparison between Shareholders Equity vs Net Worth||Shareholder Equity||Net Worth|
|Meaning||Shareholder equity can be defined as the statement of an organization that includes equity & preferred capital, retained earnings, reserves etc.||Net worth is how much a company/an individual has after paying off the liabilities.|
|Term||Shareholder equity has a definite meaning.||Net worth is a generic term.|
|Related to||Shareholder equity is relevant when the company has multiple owners.||Net worth is relevant when we are only talking about an individual or a company that has no separate identity from his/her organization (or in other terms no other owners to claim the profits).|
|Equation||Shareholder equity can be calculated in two ways. The first way is to deduct the total liabilities of the company from the total assets. And the second way is to add up all equity & preferred capital, reserves, retained earnings.||Calculating net worth is quite similar to the shareholder equity. Here we need to pay heed to the difference between the total assets and the total liabilities.|
|How do we look at the difference?||When we look at the difference between the total assets and the total liabilities in terms of the shareholder, it would be the consideration that will eventually maximize the value of the shareholders.||When we look at the difference between the total assets and the total liabilities in terms of net worth, we know that it’s what the individual can keep or the firm can keep/invest.|
Shareholder Equity vs Net Worth – Conclusion
In general, there’s no difference between shareholder equity vs net worth. It’s because, if the difference between the total assets and the total liabilities don’t match with the shareholder equity, then there is certainly an error in the balance sheet.
However, there’s a difference in the context of how we understand shareholder equity and net worth. Net worth means when a person has some assets left after paying off all his debts. But for a company, it shows how much owners’ investments are untouched after paying off the total liabilities.
Shareholder Equity vs Net Worth Video
This has been a guide to differences between Shareholders Equity vs Net worth. Here we discuss the top differences between the two along with infographics, comparison table, and practical examples. You can also refer to our recommended Accounting Articles below –