What is Expanded Accounting Equation?

Expanded Accounting Equation refers to the expanded version of the basic accounting equation for the particular corporation / sole proprietor, giving detailed information about 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 the 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

  • Stockholders Equity is the sum of the Paid-up capital of the organization reduced by Treasury stockTreasury StockTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. read more. TTreasury stock means the amount of equity stock in which the organization had earlier issues but repurchased/reacquired subsequently.Retained Earnings are arrived at by reducing the expenses and dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more from the revenue.

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Example of Expanded Accounting Equation

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:

Solution

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

  • Assets = Paid-up Capital – Treasury Stock (if any) + Liabilities + Income – Expenses – DividendsAssets = 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 organization’s financial well-being. 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 includes information from the balance sheet and 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 corporation’s assets are equal to the net impact ofA 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 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 that the whole accounting process has been followed properly. It further helps strengthen the fact that all the debit and credit entries about all transactions entered during the period have been considered.

It shows the effect of every transaction taking place and how it affects the corporation’s liabilities. 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 expenses incurred for running the operations.

Organizations use the equation to understand a holistic and descriptiveFinancial 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 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 picture. It can be used for deep diving into the organization’s financial transactions, 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

An expanded accounting equation provides a detailed view of the financial statements and shows how effectively the accounting policies are in place. Further, from a professional point of view, it provides a glimpse of the organization’s financial well-being and net worth of the organizationNet Worth Of The OrganizationThe company’s net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company’s share capital (both equity and preference) as well as reserves and surplus.read more.

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

  • Formula of Accounting EquationBalance Sheet EquationAccounting Transaction MeaningCash Basis Accounting