Expanded Accounting Equation
Expanded accounting equation is a longer version of the basic accounting equation i.e. assets = liabilities + equity. It splits assets, liabilities and equity into their components. However the relation between assets, liabilities and equity still remains the same as in the basic accounting equation.
While not its sole usage, the expanded accounting equation is mostly used by accounting instructors to help students learn the idea of debit credit and double entry. This is because expanded accounting equation bridges the gap between the basic accounting equation and advanced accounting documents such as ledgers and financial statements.
Depending on the user of the expanded accounting equation, various levels of detail may be provided for, such as paid-in capital, dividends, incomes, expenses etc. Expanded accounting equation may not expand assets and liabilities further. Since it combines the figures from both the balance sheet and income statement, the expanded accounting equation helps to understand the relationship between these two reports.
It is important to note that the components of equity differ between sole proprietorships, partnerships and companies. Therefore the expanded accounting equation is also different for different forms of business. For example, a company will use:
Assets = Liabilities + Paid-in Capital − Treasury Stock + Incomes − Expenses − Dividends
For sole proprietorship, it will be:
Assets = Liabilities + Owner Capital + Incomes − Expenses − Withdrawals
Expanded accounting equation can be used in the form of a table to record transactions of a business as shown in the example below:
Note: We have used the transactions from the journal entries page here.
Adding each of the column in the above table, we get:
147,530 = 15,564 + 100,000 + 82,600 − 45,634 − 5,000
147,530 = 147,530
Remember that the total of both sides must be equal for entries being correct. However this alone does not guarantee that all transactions have been recorded correctly. Please see accounting errors to know why.
by Irfanullah Jan, ACCA and last modified on