What What is net worth? See how to calculate it and check out some examples!

See this article:

• What is net worth?
• What is part of equity?
• What is net worth made up of?
• How to calculate net worth?
• What is personal net worth?
• What are some examples of personal net worth?
• Net worth and income tax

What is net worth?

In accounting terms, equity is the difference between an entity's assets and liabilities. It reflects the portion of equity that actually belongs to a company's shareholders or individuals, less all liabilities.

In other words, net worth is the true measure of wealth, representing the residual value after all obligations have been settled. In other words, after deducting what you owe, how much value you actually have.

This indicator is important in showing the evolution of net worth to shareholders as an indication of the company's performance over time, and it is also essential for a person to know their true wealth.

What is part of equity?

Net worth is composed of several elements that reflect the financial health and ownership structure of an entity, be it a company or an individual.

The main accounts that form part of Equity are defined in accordance with Brazilian legislation (Law 6404/76).

Thus, net worth encompasses all the elements that represent the wealth of an entity, whether a company or an individual. When considering what constitutes net worth, it is essential to encompass a variety of assets and rights, discounting obligations and debts. Some common examples include:

• Share Capital: Represents the initial investment of partners or shareholders in the company.
• Retained Earnings: Profits accumulated over time and reinvested in the company.
• Profit Reserves: Specific portions of profits allocated to reserves, such as Legal Reserve and Contingency Reserve.
• Properties: Properties and land belonging to the entity.
• Amounts Receivable: Amounts to be received from customers or other entities.
• Cash in Hand: Funds available in the form of cash or cash equivalents.
• Investments: Shares in other companies or financial investments.
• Equipment and Fixed Assets: Durable goods, such as machinery, vehicles and equipment.
• Trademarks and Intellectual Property: Intangible assets that add value to the company.
• Own Shares (Treasury Shares): Shares repurchased by the company on the market.
• Credits and Rights: Amounts to be received, such as tax credits and contractual rights.

It is important to highlight that Net Equity is the result of the difference between assets and liabilities.

Therefore, when calculating net equity, it is necessary to deduct existing financial obligations and debts. This equation provides a comprehensive view of the entity's financial health, revealing the true net value belonging to its owners.

By analyzing Net Worth, it is possible to assess financial strength, investment capacity and performance over time.

In the same way that net worth exists, it is possible to calculate the Gross Equity of a company or individual.

If you want to know about gross equity, we have a complete article here to help you understand the subject.

What are assets?

Assets represent economic resources controlled by an entity as a result of past events and from which future economic benefits are expected to flow. Simply put, they are valuable things owned by a company or individual that can be used to generate value.

Thus, within a company, there are two types of assets: current assets and non-current assets.

The distinction between current and non-current assets is crucial to understanding an entity's liquidity and financial structure. While current assets are essential for day-to-day operations and short-term investments, non-current assets represent long-term investments that contribute to the entity's sustainable value.

What are current assets?

Current assets are the resources and assets of an entity that are expected to be converted into cash or consumed within the company's normal operating cycle, typically within one year. They include items such as:

• Cash and Cash Equivalents: Cash on hand and short-term investments easily convertible into cash.
• Accounts receivable: Amounts that the company has to receive from customers or other entities.
• Stocks: Physical goods held for sale or materials used in the production process.
• Short-Term Investments: Financial investments that can be converted into cash quickly.
• Advance Expenses: Costs paid in advance that will be recognized as expenses over time.

What are non-current assets?

Non-Current Assets, also known as Fixed Assets, are resources that are not expected to be converted into cash or consumed in the short term, typically with a longer useful life. They include:

• Properties: Land and buildings owned by the entity (individual or legal entity).
• Equipment and Machinery: Durable goods used in the operation of the business.
• Intellectual Property: Intangible assets such as patents, trademarks and copyrights.
• Long-Term Investments: Interests in other companies or financial assets with a long investment horizon.
• Biological Assets: Assets related to biological resources, such as animals and crops.
• Goodwill: Value attributed to a company's reputation, brand image and customer relationships.

What are liabilities?

Liabilities represent an entity's financial obligations or debts—the sources of funds that finance assets. They are present commitments that will result in future outflows of economic resources.

Like assets, there are two main types of liabilities: current and non-current.

The distinction between current and non-current liabilities is crucial for assessing a company's ability to meet its short- and long-term obligations. Effective management of these liabilities is essential to ensuring the financial stability and operational continuity of the entity.

What are current liabilities?

Current liabilities are obligations that a company expects to settle in the short term, usually within one year. They include:

• Suppliers and Accounts Payable: Amounts owed to suppliers for goods and services purchased on credit.
• Short-Term Loans: Debts to be paid in a relatively short period.
• Salaries and Social Security Contributions: Obligations to employees, including wages and benefits.
• Taxes Payable: Amounts owed to the government in the form of taxes, such as ICMS and IRPJ.
• Provisions: Reserves to cover estimated future expenses, such as product warranties.

What are non-current liabilities?

Non-current liabilities are obligations that are not expected to be settled in the short term, typically with a time horizon longer than one year. They include:

• Long-Term Loans: Debts maturing over a longer period.
• Debentures: Debt instruments issued by companies to raise capital.
• Long-Term Labor and Social Security Obligations: Commitments to long-term employee benefits.
• Long-Term Leases: Obligations arising from long-term lease agreements.
• Long-Term Provisions: Reserves for estimated future expenses that extend beyond one year.
• Deferred Taxes: Liabilities related to temporary differences between accounting and tax records.

What is net worth made up of?

Equity is a fundamental component of a company's balance sheet, representing the difference between assets and liabilities.

It reflects the true ownership of the shareholders over the company's resources and is composed of several elements that illustrate the financial health and financing structure of the organization.

Each component of Equity plays a specific role in the company's financial structure and resource management.

Analyzing these elements provides valuable insights into the organization's financial health, reinvestment capacity, and resource allocation strategy.

See what makes up net worth:

Share capital

Share Capital is the initial amount of resources invested by partners or shareholders to found the company.

This value represents each investor's initial shareholding. In the case of publicly traded companies, share capital is also influenced by the issuance of shares on the market, such as in an IPO (Initial Public Offering).

Profit and Capital Reserves

Profit Reserves are portions of retained earnings that are set aside for specific purposes.

The main ones include the Legal Reserve, designated by law to ensure the company's financial stability, and the Contingency Reserve, intended for unforeseen situations. Additionally, there are other reserves, such as the Statutory Reserve and the Tax Incentive Reserve.

Treasury shares

When a company repurchases its own shares, they are classified as Treasury Shares. These shares can be held for later resale or canceled.

This movement directly affects Equity, since the buyback reduces the shareholding available to shareholders.

Asset valuation adjustments

Equity Valuation Adjustments refer to changes in the values of a company's assets and liabilities to reflect their fair market value.

This is especially true for assets such as property and investments. Adjustments are intended to ensure that the amounts recorded on the balance sheet accurately reflect the company's economic reality.

Negative Equity

Negative equity occurs when a company's obligations and debts exceed the value of its assets. This situation indicates a precarious financial condition, with liabilities exceeding available resources.

Companies in this situation may face significant challenges, including the possibility of bankruptcy protection.