Define "net worth."

Net worth is defined as the difference between what a business owns and what it owes. This concept is based on the fundamental accounting equation, which states that assets (what a business owns) minus liabilities (what a business owes) equals equity (or net worth). This measure is crucial in assessing the financial health of an individual or a business because it provides insight into the overall value of the entity at a given point in time.

Assets include everything the business owns, such as cash, inventory, property, and equipment, while liabilities encompass all debts and obligations, such as loans, accounts payable, and other financial commitments. Therefore, net worth serves as a snapshot of the financial position, indicating whether a business is solvent or insolvent. A positive net worth suggests that the business has more assets than liabilities, while a negative net worth indicates the opposite.

Other choices do not capture the essence of net worth. Total revenue reflects the income generated from sales but does not account for the obligations or assets. Total expenses represent the costs incurred during operations, which also do not relate directly to net worth. Finally, focusing solely on liquid assets ignores the broader picture of a business’s financial standing, as it excludes many valuable resources that contribute to overall worth.