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The Balance Sheet Method
Ever wonder how much your company is worth? The simplest way to determine the worth of your company is by using the balance sheet method. The balance sheet method looks only at the assets and liabilities of a company, and ignores any debt that the company may have.
In order to find the net worth of a company the total liabilities are subtracted from the total assets. Total assets include current assets, such as cash, accounts receivable, and prepaid expenses, and long-term assets, such as plant, property, and equipment. Total liabilities include current liabilities, such as accounts payable, notes payable within a year, and accrued interest, and long term liabilities, such as land contracts, a mortgage on a building, and notes payable in over a year. Any liability that is payable within 12 months is considered a current liability.
Even though the balance sheet method is the simplest to understand, it does have its flaws. Assets are recorded at historical costs, which are either greater than or less than their current market value. Additionally, some assets, such as patents and copyrights, are not included on the balance sheet. These types of assets may have an impact on future company profits. Although the balance sheet method is simple, it is not the most accurate approach to find the value of a company.
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