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The capital net worth of an individual or company is a very simple formula that requires only two components. Essentially, the capital net worth of an entity is simply the value of the total assets owned minus the total amount of indebtedness currently applicable to the entity. This simple equation will take in all sorts of assets, including cash on hand. At the same time, all forms of liabilities will also apply, including such items as interest on credit cards and loans.
There is some slight differences in arriving at the amounts of total assets and total liabilities, depending on whether the entity in question is an individual or a business. In the case of individuals, such factors as the amount of resources in a savings account would come into play when calculating the total assets. Fair market value for other investments would also be included, including the value of such assets as jewelry, antiques, and stocks and bonds.
For a company, capital net worth can be impacted by such elements as the amount of retained earnings, additional paid-in surplus, and the value of any shares of common stock that have been issued. The value of property used in the operation of the business will also be included. Property would be defined as land and buildings, factory machinery, and any type of durable support mechanisms, such as tools, that help to keep the company operating. In the event that the company also owns currently undeveloped land or buildings that currently are not used in the production process, those assets will also be considered as part of the overall worth or value of the corporation.
There is some difference of opinion between economists regarding how relevant the concept of capital worth is to the task of understanding the value of an entity. Some argue that the calculation of capital net worth is necessary for determining the rate of excess of assets. The idea is understanding the capital net worth is valuable in helping to determine the current rate of shareholders’ equity in the company. Other economists argue that financial statements work just as well for presenting the current status of net assets and helping to establish the value of owner’s equity and thus the actual worth of the corporation.
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