What is Net Assets?
Definition: Net Assets is the value of a company’s total assets, minus liabilities. Just like shareholders equity, net asset affirms what a company owns and what it owes. Consequently, the higher the value of a company net asset, the more valuable it is.
Assets, in this case, denote resources or things that a business owns and uses in the production of goods and services. Similarly, net assets can be prepaid expenses that a business is yet to use or yet to expire. Likewise, they can be costs with future value. Some of the assets that firms own and use in the calculation of net assets include cash, temporary investments as well as accounts receivable.
In balance sheets, the net assets value denotes the book value rather than the fair market value. That said it does not mean that a company would necessarily generate the amount quoted on the balance sheet upon the sale of any assets.
In sole proprietorship kind of businesses, the value of net assets amounts to the owners’ equity or what the owner owns. Conversely, in a corporation, net assets translate to shareholders equity. In nonprofit organizations, total assets less total liabilities appear in financial statements as net asset.
In a not-for-profit organization, net assets in the balance sheet are often divided into two. One is Net assets without donor restrictions; which are not subjected to donor-imposed restrictions when it comes to use. Second is Net assets with donor restrictions, on the other hand, comes with a string of imposed restrictions.
Net Assets Formula Calculation
The first step to calculating net assets involves ascertaining total assets, which appears on the right side of a balance sheet. The value of total asset can also be found’ on a trial balance or calculated manually by adding assets one by one.
The next step involves ascertaining what a company or business is owned. You can calculate total liabilities by adding liabilities one by one.
Finally, the value of net assets can be calculated by:
Net Assets = Total Assets – Total Liabilities
Net Assets Example
Consider company XYZ with total assets worth $26.55 million. The company owes creditors $20.42 million. Company XYZ net asset would amount to:
Net Assets- $26.55 million- $20.42 million= $6.13 million.
The value of net asset can increase substantially on business owners or stockholders, increasing their stake in the business. An increase in assets with liabilities remaining constant or decreasing goes a long way in increasing net assets, consequently strengthening the financial health of a business.
Conversely, whenever business owners or shareholders withdraw money from the business in the form of a dividend, the value of net assets decreases substantially on liabilities remaining constant. Companies with negative net assets are usually in a lot of trouble as they own less than what they are owed
One of the options of solving negative net asset problem involves selling part of the assets to generate cash in a bid to lower total liabilities. Conversely, a business increasing investment in the business can go a long way in providing much-needed financings for settling some debts crucial to lowering liabilities.
A business with negative net assets may also try to boost its financial position by renegotiating its existing debt to lower the principal due. In mild situations, a firm may decide to go for Chapter 11 protection an option that provides leeway for debts restructuring. If all these solutions fail to bear the desired results, a firm with negative net assets may have to file for Chapter 7, a process that often leads to business liquidation.
Summary
Net asset in a balance sheet affirms the financial health of a company or business or an individual. If the value of a company’s assets is increasing, while liabilities are decreasing, then the company is considered to be healthy financially.