Whether we discuss a corporation or a person’s financial life, the notion of equity is the same. In accounting, equity is the difference between assets and liabilities. Or the difference between your assets and rights and your responsibilities.
If you liquidated all your belongings and added them to your investments and bank accounts, you would have your net worth (PL) after paying off all debts and other commitments.
Assume you have purchased a $400,000 home. It took out a loan for this purpose and still owes $300,000 to this day. Because you only own a fraction of the property, your PL is $100,000 in this scenario. In other words, if you market the property for $400,000, you will have to pay off the loan with $300,000, leaving you with only $100,000.
That is why the PL provides the accurate dimension of a person’s, a company’s, or even a country’s wealth. For example, you may look at someone who lives in a lovely home in an elite area, has two new vehicles in their garage, and has children who attend expensive schools and infer that she is wealthy.
However, you may finance the house and automobiles, and the person has bank debt. If we perform the arithmetic, we can see that this individual has negative equity, which means that the debts exceed the value of the assets.
Consider someone who owns some real estate but is also in debt to a bank. Depending on the prices, that individual may sell one of the houses and pay off the mortgage. On the other hand, indebted persons might have a positive net worth if the total value of their assets exceeds the actual value of their debts and commitments.
What Items Are Part of Personal Equity?
To answer this question, let’s go back to what we said: equity is the difference between assets and liabilities. We can say that assets are goods and rights. That is, they are the positive part of your equity, while liabilities are obligations, therefore, the negative part of your equity.
Thus, some examples of assets are:
- properties
- automobiles
- cash in checking account
- financial investments
- FGTS balance
- Copyright
On the other hand, we have as examples of liabilities:
- Debt balance of financing (real estate, cars, etc.)
- The outstanding balance of loans
- Credit card balance due
- Personal loan
- Debts with taxes
- Rents payable
- Debit balance of purchases in installments
It’s easier to understand your wealth now that you know how to categorize the components that comprise your financial life.
Why is it Critical to have Control Over One’s Net Worth?
By calculating your net worth regularly, you will create history and understand how your evolution is genuinely taking place, not only in appearance. It will assist you in determining your genuine wealth level and how near (or distant) you are to accomplishing your objectives.
Assume your goal is to have $1,000,000 in equities. You have $500,000 apartments with $100,000 down payments. Isn’t it true that the aim requires $400,000? That’s incorrect because you used financing in the purchase of your house. As a result, the debt total for funding must come out of these $600,000.
Knowing your net worth will assist you in making efficient financial plans and identifying habits that you must modify to achieve your objectives and safeguard your money to make your life smooth when filing your income tax return.
How do I Report my Net Worth on my Income Tax Return?
As previously stated, keeping track of your net worth aids in the completion of the Income Tax return. Even if the asset is purchased with financing, this is true. You must display all moveable and immovable property and rights in the “Property and Rights” form in the Federal Revenue program.
In this situation, you must state the amount that has been paid thus far and update this figure every year. Personal loans, on the other hand, are a different story. These sums must be stated in the program’s “Debts and Real Liens” form. Other earnings, such as pay and remuneration for services done, should be reported on the “Taxable Income” form.
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