Net worth is a vital determinant of a company’s future, considering that it is composed mainly of all the money that has been invested since the day it has started, as well as the retained profits on the course of its operation. That being said, knowing one’s assets and liabilities is a must because these two are a part of the net worth equation. Taking particular notice at one’s assets and liabilities can give the company an image of its current standing and the direction at which it is heading.
To have a snapshot of a company’s finances, one must first look at the assets. Assets are anything with financial value owned by an individual or business which can produce cash flow and provide earnings. When it comes to business, assets consist of currents assets, capital assets, investments, and intangible assets.
Current assets are anything that can be readily converted into cash. A few common examples include cash and cash equivalents, inventory, accounts receivable, and notes receivable.
On the other hand, capital assets are those holdings which are not likely to be sold. Land, buildings, machineries and equipment are common capital assets. Investments are viewed as assets as well. These include securities such as stocks and bonds. Copyrights, trademark, and licensing agreements are examples of non-physical assets or intangible assets.
Liabilities, also commonly called as payables, are company debts or items that a company has to pay to another person or company. Liabilities are usually categorized as either current liabilities, or long-term liabilities. Current liabilities are debts that are due in a short period of time (one year or less) and are usually paid with current assets. Long-term liabilities, on the other hand, are debts or obligations that can be paid beyond a year and are usually paid with capital assets.
Taxes payable (taxes you owe), salaries payable (salaries you owe employees), accounts payable (what you owe others on account), and notes payable (promissory notes to creditors) are common examples of current liabilities. Common examples of long-term liabilities include mortgages payable, bonds payable and long-term notes.
Gathering information about one’s assets and liabilities can give you your net worth. Simply subtracting the total liabilities from total assets will already give you the value of net worth.