If someone asked you, “What’s your wealth?” what would you answer? If you consider this question closely, you’ll note that you could only respond accurately by referring to a particular point in time. So, a better question to ask might be, “What’s your wealth right now?”
Components of Wealth
Wealth is measured by grouping assets and liabilities. Assets represent items that will provide future value to the owner. Banks consider assets to be things like cash, financial investments including GICs or RSPs, a car and a house. Liabilities are items that require the owner to provide future economic value to someone else. Banks consider mortgages, car loans, and credit card debt to be liabilities. So, if asked “What’s your wealth?” you might respond by saying, “My wealth is a combination of my (assets) minus my (liabilities) which equals my (net wealth).”
Businesses like people also have assets and liabilities. Additionally, a business may have claims on its assets by many owners. In cases like these owners that have invested in the business may have a right to the portion of the financial success of the business. This financial interest is sometimes referred to as the owners’ stockholder’s equity.
The Balance Sheet
The wealth of a business is measured at a point in time using a balance sheet. The balance sheet is the starting point for all financial documents produced by a business entity. Balance sheets measure the assets, liabilities and net worth of a business using the formula: Assets = Liabilities + Stockholders’ Equity.
Elaine Allan, BA, MBA
Technology & Business Blogger