The net worth of a company may be referred to as shareholders’ equity. Shareholders’ equity appears on a company’s balance sheet and represents the amount owners have invested in the business. Calculating equity in a private company is the same as calculating equity in a public company. The net worth of a private company is determined by subtracting the company’s obligations from its resources.
Knowledge of the accounting equation is important when calculating the net worth of a private company. The accounting equation states that assets equal liabilities plus shareholders’ equity. Just as the accounting equation indicates, assets appear on the left side of the balance sheet, while liabilities and stockholders’ equity appear on the right side of the balance sheet. The accounting equation can be rearranged to indicate that equity equals assets minus liabilities.
Assets are resources controlled by a company that provide a future economic value to the business. The company must add its current, long-term and intangible assets to calculate total assets. Current assets include cash, accounts receivable and other assets that will be converted to cash within one year. Long-term assets will be converted into cash in more than one year, such as land, furniture and computer equipment. Intangible assets include copyrights, patents and goodwill. Assume a private company has total assets of $1,250,000.
Liabilities are obligations placed on a company’s resources. Long-term liabilities must be added to current liabilities to determine the company’s total liabilities. Current liabilities have to be repaid within one year, such as accounts payable, salaries and wages payable, interest payable and unearned revenue. Long-term liabilities will become due in more than one year, such as leases, mortgages payable and notes payable. Assume a private company has liabilities totaling $975,000.
The difference between a company’s assets and liabilities represents the net worth or equity in the private company. Assuming a company has total assets of $1,250,000 and total liabilities of $975,000, the company has a net worth of $275,000. This means owners have $275,000 of equity invested in the company.