What does the net worth formula represent?

What does the net worth formula represent?

• A. Net worth equals assets minus liabilities.
• B. Net worth equals liabilities minus assets.
• C. Net worth equals assets plus liabilities.
• D. Net worth equals income minus expenses.

Answer: (A)

Net worth shows your financial position at a specific moment by subtracting what you owe from what you own. The best way to express that is assets minus liabilities. When assets exceed liabilities, net worth is positive; if liabilities exceed assets, it’s negative. For example, if your assets total $355,000 and your liabilities total $295,000, your net worth is $60,000. This measure changes as you save, invest, or pay down debt. Subtracting liabilities from assets would give the opposite sign and doesn’t reflect the actual level of wealth you own. Adding assets and liabilities mixes two different concepts and isn’t meaningful for net worth. Income minus expenses describes cash flow over a period, not your current wealth.

Net worth shows your financial position at a specific moment by subtracting what you owe from what you own. The best way to express that is assets minus liabilities. When assets exceed liabilities, net worth is positive; if liabilities exceed assets, it’s negative. For example, if your assets total $355,000 and your liabilities total $295,000, your net worth is $60,000. This measure changes as you save, invest, or pay down debt.

Subtracting liabilities from assets would give the opposite sign and doesn’t reflect the actual level of wealth you own. Adding assets and liabilities mixes two different concepts and isn’t meaningful for net worth. Income minus expenses describes cash flow over a period, not your current wealth.