Expanded Accounting Equation: Definition, Formula, How It Works


Harold Averkamp has worked as a university http://rembook.kiev.ua/node/505 instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.

The effect of net http://stolby.com/forum/34-374-2 on stockholders’ equity is reflected in the difference in revenue and profit and expenses and losses. The contributed capital and dividends, on the other hand, show the effect of transactions with the stockholders. The equation showcases how a company’s stockholders’ equity changes over time or throughout the accounting cycle. You will notice that stockholder’s equity increases with common stock issuance and revenues, and decreases from dividend payouts and expenses. Stockholder’s equity is reported on the balance sheet in the form of contributed capital and retained earnings. The assets in the standard accounting equation are the resources that a company has available for its use, such as cash,accounts receivable,fixed assets, and inventory. Thus, there are resources with offsetting claims against those resources, either from creditors or investors.

Income and retained earnings

So in order to balance the equation, one asset must increase and other must decrease . Let’s identify the two accounts involved in this transaction.


The concept of http://alphadigital.ca/about-us/ is fundamental to accounting and states that a firm’s total debits on the left side must equal the total credits on the right side. Liabilities are obligations to pay an amount owed to a lender based on a past transaction. It is important to understand that when we talk about liabilities, we are not just talking about loans. Money collected for gift cards, subscriptions, or as advance deposits from customers could also be liabilities. Essentially, anything a company owes and has yet to pay within a period is considered a liability, such as salaries, utilities, and taxes. Machinery is usually specific to a manufacturing company that has a factory producing goods.

Expanded Accounting Equation- Example 3

Advisory services provided by Carbon Collective Investment LLC (“Carbon Collective”), an SEC-registered investment adviser. Includes information from the balance sheet and provides information about the income-expenditure statement. Concept From The AccountingAccounting concepts are the principles, assumptions, and conditions that govern accounting’s foundation.


The components of equity include contributed capital, retained earnings, and revenue minus dividends. Both accounting equations follow double-entry bookkeeping, which states that a company’s total debits on the left side must equal the total credits on the right side. In general, the major benefit of utilizing the expanded version of the accounting equation is the additional clarity on the equity portion of the balance sheet over time. The expanded accounting equation is a more detailed version of the common accounting equation. It provides greater detail on the different sections of shareholders’ equity, allowing companies to see how their profits are used. Notes receivable is similar to accounts receivable in that it is money owed to the company by a customer or other entity. The difference here is that a note typically includes interest and specific contract terms, and the amount may be due in more than one accounting period.

How to Journalize Notes Payable to Accounts Payable

Shareholder’s equity is the company owners’ residual claims on assets after deducting all liabilities deducted. The expanded accounting equation will further break them down. Common examples of assets include cash, accounts receivable, machinery, land, and prepaid expenses. The accounting equation defines a company’s total assets as the sum of its liabilities and shareholders’ equity. This provides valuable information to creditors or banks that might be considering a loan application or investment in the company. For example, if there are significant treasury stock transactions, it can give an indication of what management is trying to accomplish regarding stock price. It also indicates what management’s views about the future are.

  • The Financial Accounting Standards Board had a policy that allowed companies to reduce their tax liability from share-based compensation deductions.
  • This factor reduces the equity of the owner of the corporation.
  • Assets are the company’s resources that have a future benefit.
  • It can be used for deep diving into the organization’s financial transactions, thereby also in the detailed analysis of the financial statements.
  • With that being said, no matter how the formula is laid out, it must always be balanced.
  • These two values must balance one another or a mistake would have been made.

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