What Is the Difference Between Book Net Worth and Shareholder's Equity?
- Assets are the resources such as cash, equipment, and vehicles individuals and businesses use to produce benefits for themselves. Liabilities are the debts and other such obligations that the individual or business owes to others.
- Net worth is equal to the sum of assets minus the sum of liabilities for both businesses and private individuals. Total assets include both tangible assets such as cash and equipment and intangible assets such as patents and brand recognition. For example, if a man owns a $120,000 house, a $20,000 car, $8,000 in cash, but owes $45,000 in loans, that man has a net worth of $103,000. For businesses, the net worth is also called owner’s equity; for corporations, the net worth is more specifically called shareholders’ equity. For example, if a corporation held $2,000 in cash, $20,000 in a patent, $80,000 in equipment, and owed its suppliers $45,000, that corporation has a net worth, or shareholders’ equity, of $57,000.
- For all organizations that are run to produce a profit, net worth is more often called equity. Equity is calculated using the same equation as net worth and represents the same concept – it is the portion of the business’s resources its owner or owners own outright, free of any debts or obligations. Equity can include accounts such as the owner’s investment and the earnings reinvested into the business’s operations.
- Shareholders’ equity refers to the equity and thus the net worth of a corporation. It is called thus because the stock shares that shareholders purchase often provide them with ownership benefits and privileges. Shareholders’ equity is equal to the corporation’s assets minus its liabilities, or alternatively as the sum of all equity accounts. The two most important equity accounts are the paid-in capital raised through the corporation issuing its shares to its shareholders and the retained earnings the corporation reinvests instead of distributing as dividends. Other equity accounts can include such items as donated capital and unrealized gains and losses.