How is net worth at a given time calculated?

Net worth at a given time is calculated by taking the previous net worth and adding the net income for the period. This reflects the change in an individual’s or company's wealth over time, considering earnings that have been retained rather than distributed as dividends.

Net worth at a specific moment can be conceptualized using the accounting equation, where net worth is the difference between total assets and total liabilities. When assessing changes in net worth over a period, any income generated during that time (net income) contributes to the overall growth of net worth. Thus, the correct method involves adding net income to the prior state of net worth, which represents an increase in financial value due to the operations within that period.

Options that subtract or change the perspective on net income and dividends do not correctly align with the conventional understanding of how net worth accumulates over time. For example, subtracting dividends from net income does not provide a clear picture of net worth, as dividends are part of the distribution of earnings rather than a component of the net worth calculation. Hence, by adding net income to the previous net worth, we accurately capture the financial position at the end of the period.