What is the Expanded Accounting Equation?

The Expanded Accounting Equation is a more detailed version of the Basic Accounting Equation that adds details about changes in owner’s equity due to day-to-day transactions in the business. It provides additional details of how an owner’s equity in the business changes over a period of time, and from which areas of the transactions of a business.

What is the Basic Accounting Equation?

The basic Accounting Equation is:

Assets = Liabilities + Equity

Using the basic Accounting Equation, all changes to an owner’s equity are calculated within the broad category of Equity.

To learn more about the Basic Accounting Equation, check out this article:

What is the Difference Between the Basic Accounting Equation and the Expanded Accounting Equation?

The Expanded Accounting Equation demonstrates the effect of the changes in Owner’s Equity because of:

  • Owner investments (money the owner adds to the business)
  • Dividends or Withdrawals (money the owner takes out of the business)
  • Revenue (an increase in equity because of sales to customers)
  • Expenses (a decrease in equity due to expenses incurred in making Revenue)

Assets = Liabilities + Beginning Equity + (Investments – Dividends + Revenue – Expenses)

Essentially, Accounting is all about tracking the changes to the Owner’s Equity. Some equity comes from investments into the business by the owner. Some equity comes from having more Assets than Liabilities. Some Equity comes from Revenue. And then, reductions to Equity come from withdrawals and expenses.

To learn more about the Accounting Equation, watch this video:

Video explaining the Accounting Equation.

Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 13 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

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