Expanded Accounting Equation

What is Expanded Accounting Equation?

Expanded Accounting Equation refers to the expanded version of basic accounting equation for the particular corporation / sole proprietor, giving detailed information pertaining to financial transactions of the corporation such as assets, liabilities, share capital, income, expenses, and withdrawals.

The Expanded Accounting equation is generally different for varying forms of businesses. The equation differs slightly in case of a proprietary concern, partnership firm, and corporation.

For a proprietary concern, the equation will be:

Assets = Owner’s Capital – Drawings + Liabilities + Income – Expenses

For a partnership firm, the equation will be:

Assets = Partner’s Capital – Distributions + Liabilities + Income – Expenses

For a corporation, the equation will be:

Assets = Stockholder Equity + Retained Earnings

Expanded Accounting Equation = Paid-up Capital – Treasury Stock (if any) + Liabilities + Income – Expenses – Dividends

Expanded-Accounting-EquationExpanded-Accounting-Equation

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Expanded Accounting Equation (wallstreetmojo.com)

Example of Expanded Accounting Equation

You can download this Expanded Accounting Equation Excel Template here – Expanded Accounting Equation Excel Template

Let us take the example of Foods & Drugs Inc. The Company was incorporated on 1 June 2019 with a paid-up capital consisting of 1000 shares having a value of $50. During the first quarter of its operations, the company has entered into the following transactions:

DateTransaction
1-JunCapital introduced – $ 50,000
6-JunPaid $10,000 for purchase of furniture and computers.
15-JunPaid $ 5,000 towards purchase of machinery and equipment.
Paid $ 1,000 towards purchase of raw materials
22-JunIncurred expenditure towards advertising and marketing amounting to $200
30-JunPaid salaries to its employees – $13,000
30-JunPaid Rent and telephone bills – $15,000
13-JulEarned revenue through sale of products worth $ $ 35,000
18-JulMade payments towards petty cash and bills for $ 1,500
31-JulPaid salaries to its employees – $13,000
31-JulPaid Rent and telephone bills – $13,500
05-AugReceived $28,000 as an advance from suppliers for future orders
26-AugPurchased raw materials costing $5,000 on credit
31-AugPaid salaries to its employees – $13,000
31-AugPaid Rent and telephone bills – $17,000
31-AugPaid $1,000 as dividend
31-AugMiscellaneous expenses paid $3,000

Solution

Below table provides the segregation of the aforementioned details under specific heads:

Expanded Accounting Equation Example 1
  • Assets = Paid-up Capital – Treasury Stock (if any) + Liabilities + Income – Expenses – Dividends
  • Assets = 50000 – 0 + 0 + 63000 – (-110200) – (-1000)
  • = 1800

Relevance and Use

It is an important concept from the accountingConcept From The AccountingAccounting concepts are the principles, assumptions, and conditions that govern accounting's foundation. They ensure that the accounting is done in a way that the financial statements present a true and fair view.read more point of view because it provides a picture of the financial well-being of the organization. The accounting equationAccounting EquationAccounting Equation is the primary accounting principle stating that a business's total assets are equivalent to the sum of its liabilities & owner’s capital. This is also known as the Balance Sheet Equation & it forms the basis of the double-entry accounting system. read more not only includes information from the balance sheet but also provides information about the income-expenditure statement.

As seen in the example above, the net result of the expanded accounting equation is such that the assets of the corporation are equal to the net impact of stockholder equityStockholder EquityA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company's owners, but their liability is limited to the value of their shares.read more, liabilities and net earnings. A balanced equation also ensures the fact that the whole accounting process has been followed properly. It further helps strengthen the fact that all the debit and credit entries pertaining to all transactions entered during the period have been taken into consideration.

It basically shows the effect of each and every transaction taking place and how it affects the liabilities that the corporation may have. Further, it also elaborates on the detailed aspects of any increase in cash flows on account of revenue earned or any decrease in cash flowsCash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more on account of expenses incurred for running the operations.

The equation is used by organizations to understand a holistic and descriptive picture of the financial statementFinancial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. It can be used for deep diving into the financial transactions of the organization thereby also in the detailed analysis of the financial statements.

Professionals use it to understand the effectiveness of the accounting policiesAccounting PoliciesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level.read more followed by the organization.

Conclusion

Expanded accounting equation not only provides a detailed view of the financial statements, but it also shows how effectively the accounting policies are in place. Further, from a professional point of view, it provides a glimpse of the financial well-being and net worth of the organization.

Recommended Articles

This has been a guide to what is Expanded Accounting Equation. Here we discuss types of the expanded accounting equation, its elements along with an example. You may refer to the following articles to learn more about accounting –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *