Net Worth is the financial position of a person (Individual or Corporate) at a point of time and is measured by his total assets less total liabilities.
The statement of net worth (also called balance sheet) summarizes a person’s financial condition at a certain point of time, i.e. as on date. It represents what a person owns – the assets, against what he owes – the liabilities or debt, and what he is worth – his net worth.
One fundamental relationship that we need to understand is popularly known as the accounting equation or accounting equation of the balance sheet. It states:
NET WORTH = ASSETS – LIABILITIES
For calculating Tangible Net Worth, one must exclude Goodwill and other intangible assets from the Assets.
TANGIBLE NET WORTH = ASSETS – GOODWILL – LIABILITIES
One can monitor the improvement in financial position by comparing the net worth statements at different points of time. Any major deterioration or increment indicates that steps must be taken to alter the overall financial plan.
Banks always consider the net worth of self-employed Individuals and Corporates at time of sanction of Credit facilities and any deterioration in Net Worth has to be explained properly.
Time Value of Money and its importance for investors
If we give you two options
- Take INR 10000 today or
- Take INR 10000 after a year
Which one do you choose?
You will obviously go for the first option for two reasons, firstly why live in uncertainty for one year and second, if you invest INR 10000 today in the most secured way like Bank FDs, it will generate a positive return most of the time. Waiting for a year will delay this opportunity. This concept of money being valuable today is referred to as time value of money.
The notion that money has time value is one of the basic concepts of finance. Most financial decisions at the business level and individual level involve exchanging money now with the money in future. The Time value of money is based on the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than the same amount in the future, all else being equal. In other words, the present value of INR 10000 of money is greater than the present value of the right to receive the same amount of money at in the future. As most financial decisions affect the cash flows over a long period of time, the explicit recognition of the time value of money becomes important for rational and optimal decisions. The main preference to receive INR 10000 today rather than time in future are:
- Preference for consumption today
- Premium for inflation
- A premium for credit risk
- The possibility of risk-free returns
In order to overcome this time preference, the individuals or firms must be suitably rewarded. This reward is known by the various names like interest, cost of capital, required rate of return or cost of financing.
It is important for investors to understand Time value of Money before making investment decisions. For more visit @AntworksMoney Personal Loan Option.
