Expanded Accounting Equation
Expanded accounting equation, as the name implies, is an expanded form of the standard accounting equation and it shows components of owner's equity such as paid-in capital, dividends, incomes, expenses etc. Expanded accounting equation does not expand assets and liabilities further. It helps to understand the relationship between balance sheet and income statement because it combines figures from both of the financial statements.
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 corporation 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.
Summing the 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|
Written by Irfanullah Jan