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Net worth calculation

TONYJA (free lance) (136 Points)

27 September 2015

hi experts, while calculating net worth why we are adding deferred tax liabilities or deducting deferred tax assets.like deducting goodwill and patents and misc.expenditurs.what is the underlying concept. regards tonyja

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TONYJA (free lance) (136 Points)
Replied 28 September 2015

Can anyone reply pls

Mukund (Nil) (36 Points)
Replied 29 September 2015

An asset is one which earns money for you,Cash is an asset which if you keep in the Bank will earn you interest.Goodwill is potential to earn money,like if you are a chartered accountant if you buy 2-3 clients from your friend you will pay cash immediately for those clients which your friend has to him,but your earnings will accrue after some years from those clients if those clients decide to stay with you.

A deferred tax asset is like ability of someone making profits in future years against current losses....the certainity is not guaranteed....on other hand a deferred tax liability there is a certainity to pay that as you have taken advantage of postponing paying the tax of already earned profits.

So usually if you go to borrow money from Private Banks or Lala for your business,he will see what is capital & asset of your firm.......he will lend money only for tangible assets & not for goodwill etc etc.Ideally in accounting standards Goodwill,Intangible assets,deferred tax,deferred liability,Miscellenous expenses should be adjusted to retained earnings/capital.

But since we live in a capitalistic society our accounting standards have given leeway to inflate assets which we don;t possess so we can borrow from Banks.However private banks or lala will not give money for inflated assets so like a onion they will peel off all the unwanted things in the balance sheet which you will call as asset.