Definition of Expanded Accounting Equation
The expanded accounting equation provides more details for the owner’s equity amount shown in the basic accounting equation. The expanded accounting equation for a sole proprietorship is: Assets = Liabilities + Owner’s Capital + Revenues – Expenses – Owner’s Draws.
The expanded accounting equation for a corporation provides more details for the stockholders’ equity amount shown in the basic accounting equation. The expanded accounting equation for a corporation is: Assets = Liabilities + Paid-in Capital + Revenues – Expenses – Dividends – Treasury Stock.
The expanded accounting equation allows you to see separately (1) the impact on equity from net income (increased by revenues, decreased by expenses), and (2) the effect of transactions with owners (draws, dividends, sale or purchase of ownership interest).
