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Question

a) When net worth increases from one year to the next, what is happening between the assets and liabilities (or, what does the change imply)?

b) When net worth decreases from one year to the next, what is happening between the assets and liabilities (or, what does the change imply)?

Answer 1

Mina,

 

Net Worth = Assets less Liabilities  or N = A - L , where A and L are positive dollar figures. N can be positive or negative.

So for 2 consecutive years you can write N₁ = A₁ - L₁  & N₂ = A₂ - L₂

 

The change in Net Worth then is [N₂ - N₁]  =  [A₂-L₂] - [A₁ - L₁] = [A₂ - A₁] - [L₂ - L₁]

Thus,

(a) When Net Worth increases, [N₂ - N₁] >= 0 . This can occur in different ways looking at the equation. An increase in Assets exceeds the increase in Liabilities or the Liabilities decrease.  Or if the Assets decrease, the Liabilities decrease even faster, or basically any combination that makes the change equation positive.

 

(b) When Net Worth decreases,  [N2 - N1] <= 0 . This can occur in different ways looking at the equation. An increase in Assets is less than the increase in Liabilities. Or if the Assets decrease, the Liabilities decrease slower enough, or basically any combination that makes the change equation negative.