Shareholders’ equity and net worth are two measurements of value of an entity. They look at how much would be left of all the money if all debt is paid off. Although these two terms are interchangeable in business, there is just one way in which they differ.
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There are two ways to calculate shareholders’ equity. The first is to deduct total liabilities from total assets. This method takes everything of positive value in the company (assets) and deducts all debt and obligations (liabilities). The money that is left over after paying off all debt rightfully belongs to the shareholders, and so this is their equity in the company.
Another method of calculating shareholder’s equity is to add together the money originally invested in the company and the earnings that have since been retained. Both formulas should arrive at the same value because everything in a company is either an asset or a liability, therefore shareholders cannot possibly own anything other than the company’s assets minus its liabilities.
The net worth of a company is all the assets it possesses minus all its debts and liabilities. If that definition sounds familiar it is because this is the same method for calculating shareholders’ equity. This demonstrates that shareholders’ equity and net worth are the same thing in the corporate world.
Despite the exact same formula describing both the net worth and the shareholders’ equity in a business, there is one difference in the scope of the two words. “Shareholder” specifically relates to the partial ownership of a company. “Net worth” does not necessarily have to be limited to the business world. People have possessions and debts, which mean they, like companies, have assets and liabilities. One thing that people don’t have that companies do is shareholders. Therefore, the term “net worth” can apply to people as well as companies. “shareholders’ equity” can only apply to the financial data of companies.
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