The net assets is the difference between the assets and the debts that a company has.
In other words, to calculate the net assets, what we will do is the following: the debts generated by those assets are deducted from the total assets that a company owns.
By means of the net assets we can know what is the value of the debt-free assets. Net assets are, for accounting purposes, the same as net worth. Ultimately, net assets reflect the value of the company.
Composition of net assets
As we have commented previously, the net assets are obtained by means of the difference between assets and debts:
- Assets. Assets represent the resources with economic value that someone owns with the intention of generating a future benefit. For a company and in accounting terms, assets represent the assets and rights acquired, through which it is expected to obtain future benefits. Examples of assets are machinery, a vehicle, a computer, inventory, or cash.
- Debts. A debt is the obligation that a natural or legal person has to fulfill its payment commitments, as a result of the exercise of its economic activity. From an accounting point of view, debts are called liabilities. Liabilities represent the debts and obligations with which a company finances its activity and serves to pay its assets. Examples of liabilities are debts with financial entities, with suppliers or with the Public Administration.
Example of calculating net assets
To understand net assets more clearly, we are going to present a numerical example.
"A company has assets valued at 100 and debts valued at 40. What is the value of its net assets?"
Net assets are calculated by subtracting net assets and debts. Therefore:
Net assets = Assets – Debts = 100 – 40 = 60
Thus, according to the previous calculation, we will say that the net assets are valued at 60. The conclusion we obtain is that the company is valued at 60 economic units.
Difference between gross assets and net assets
The difference between gross and net is that a net quantity is the final quantity that remains after some change has been made to the gross quantity.
For our purpose in this post, the following formula could be used:
Net assets = Gross assets – Debts
In this case, the discount refers to debts. Therefore, the gross assets would be the total valuation of the assets and the net assets would be the valuation of the assets discounting the debts. In the example in the previous section, as we already calculated, the net assets would be 60, while the gross assets would equal the total assets without discount, so it would be valued at 100.