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Financial statements are usually instrumental in assessing the overall net worth of either an individual or business entity. It is vital to note that such statements may not be comprehensible enough if they are not presented in the form of assets and liabilities. This paper explores the relevance of assets and liabilities when evaluating net worth.
To begin with, the initial step taken when assessing the net worth of a person entails finding out the total value of assets that are owned by the individual. In this case, an asset is referred to as all forms of personal property that can be lawfully transferred into liquid cash (Helewitz 77). Needless to say, the basic asset owned by an individual at any given time entails the cash at hand. Examples include funds which have been held by brokerage houses, certificates of deposits as well as cash deposited in savings and checking accounts. Financial institutions that hold these funds can provide statements that can be used thereafter to determine this amount. However, some people may opt to keep some of their finances in safe deposit boxes that may not necessarily be visible in financial statements.
The intangibles form the next classification of assets. These are individual properties that represent some form of value although they do not have value by themselves. For instance, securities and corporate shares are typical examples of intangible assets. Beside, corporate debenture and bonds are also closely related to corporate shares. A bond refers to a debt that has been secured for a long period of time and in which periodic interests are paid to the creditor up to the time when the discharge of the debt takes place. Intellectual property such as marks, patents and copyrights also form part and parcel of intangible asset (Helewitz 78).
Tangible assets are also very visible elements when evaluating statements of net worth of a person or business enterprise. These include electronic equipment, works of art and collectibles, jewelry, furniture, cars and so forth. It is imperative to mention that the aforementioned items should be enlisted and separate valuation carried out when determining net worth. In addition, it is usually advisable for thorough documentation of all the real property of a person (Mosshart 53).
Liabilities form a very important part when evaluating the net worth of a person. Once the total assets of a person have been summed up, all the liabilities must also be assessed. The difference between the assets and liabilities accounts for the net worth.
Assets-liabilities= Net worth.
In this regard, liability depicts the indebtedness of a person in terms of all debts that must be paid out by an individual such as ordinary expenses, interest payments, taxes as well as mortgages. Moreover, if a person is financially liable for expenses incurred by other people, such debts should be included in the list of liabilities. For instance, healthcare expenses for children and tuition payments fall under this category.
While the various assets and liabilities discussed above form the cornerstone of a persons net worth, all sources of income such as employee benefits, bonuses, salaries and wages should be itemized as assets when evaluating net worth. On the same note, all expenses such as rent levies and payments made on utility bills (electricity and water) ought to be considered as liabilities (Mosshart 52).
To recap it all, the net worth of an individual is computed by obtaining the difference between assets and liabilities. A negative value indicates a questionable financial performance and possible bankruptcy of an individual or business enterprise.
Works Cited
Helewitz, Jeffrey. Understanding statements of net worth. Paralegal Today 16.1(1998): 76-80. Print.
Mosshart, Joshua. Net Worth Its Your Most Important Number . Agency Sales, 38.3 (2008): 52-53. Print.
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