Net worth in simple words refers to net assets which imply total assets less total liabilities of the company. In order to calculate net worth of a company one should add Equity share capital, Preference share capital, Reserves and Surplus available with the firm and deduct from this all fictitious assets or intangible items like miscellaneous expenditure, preliminary expenses and so on.
Debts are not considered in the calculation of net worth of the company. It is also called owner’s equity as it does not include outsider’s debt like debentures, long term loan, bank loan etc
Example:
Given a firm has the following financial figures in its balance sheet, what is its net worth?
- Capital: Rs 12 lac
- Reserve: Rs 4 lac
- Unsecured loan: Rs 5 lac
- Current assets: Rs 16 lac
- Pre operative expenses: Rs 2 lac
Hence: Net Worth = Capital + Reserve - Pre-operative Expenses
= 12 Lac + 4Lac − 2Lac
Net Worth = 14Lac
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