Net assets can be obtained by subtracting total assets from total liabilities. In a sole proprietorship, they are also reported as owner's equity. While if we talk about the corporate side, some net assets are reported as stockholders' equity.
Net assets are the same as shareholders' equity as both show the difference between what the company owns and what it owes to others. As mentioned above Net assets are more commonly referred to as Shareholder equity.
We can say that the amount of retained earnings left with the company. Retained earnings or profit made is not distributed among owners rather it is kept with business for investing in projects.
Net assets are the same as equity, but there comes a slight change as it refers to the amount the owner owns or directly the owners claim over the assets of the company. This term arises from the accounting equation.
Assets = Liabilities + Owner’s Equity
Net assets = Total assets - Total liabilities
Example of net assets formula
We can take an example to explain this concept further.
Let's assume that Company ABC’s Balance sheet reported $1500000 in assets and $500000 in total liabilities. The company's net assets would be:
Net Assets = $1500000 - $500000= $1000000
For further explaining Net assets we can divide it into following three sections
Unrestricted Net Assets
These are a group of items that are owned by the government with commercial or exchange value that have no external restrictions o it regarding their use or function, in other words, they are restrictions free.
These assets appear in government accounting and are government-owned assets that can be utilized for any purpose that is decided.
When a donor doesn't mention exactly where, how and when they are going to use is the given donation, then it is known as an unrestricted contribution.
The donation will appear on different statements that include (the income statement ) as unlimited offering revenue and will appear on the statement of financial position (balance sheet) as an asset and will increase unrestricted net assets.
Being unrestricted, the non-profit can then use the benefaction for whatever purpose it sees fit to achieve its goal
Temporarily restricted net assets
The second section of a net asset is temporarily restricted net assets. Net assets that have donor-imposed restrictions such as
- Fulfilling a specified purpose.
- The span of a specified amount of time.
Fulfilling Specific Purpose
It includes any specific purpose in the mind of the donor which he wants to achieve. It will not be a profit side purpose, but yes it will serve a nonprofit purpose in which will be towards the betterment of society eliminating profit factor.
The span of a specified amount of time.
It might include that donor require completion of the specific purpose within a specified amount of time. The donor will tell the company about the amount of time within which he wants the purpose to be fulfilled.
Permanently Restricted Assets
Assets of a nonprofit organization that comes with some restrictions are said to be permanently secured assets.
Permanently restricted assets are those assets that are given to a nonprofit by any outside individual, agency or third party with certain restrictions on their use or purpose.
Permanently Restricted assets are donated items & they have limitations on them that are attached to it for perpetuity.
Those assets that are classified as permanently restricted must be listed as a separate category of assets on the charity’s Statement of Activities.
Cash or other assets without which liabilities could be paid off but still should be kept for rainy days. They might also be stored for some particular purpose.