Expanded Accounting Equation
Similar to the basic accounting formula, the expanded accounting equation portrays the relationship among the different accounting components.
The main difference between the two is that in the expanded accounting equation, the “capital” component is segregated into several parts known as contributions, withdrawals, income and expenses.
We are familiar with the fact that capital is influenced by contributions, withdrawals, income and expenses.
Capital is increased by contributions and income whereas it is decreased by withdrawals and expenses.
So, the accounting equation for a single business can be written as:
Assets = Liabilities + Capital – Withdrawals + Income – Expenses
The contributions of the owners are added directly into the Capital so the additional contributions are already a part of the Capital.
However, if you are interested in displaying all elements, then you may rewrite the accounting equation as follows:
Assets = Liabilities + (Capital, beginning + Additional Contributions – Withdrawals + Income – Expenses)
Consider the following transactions:
- A printing business was started by Mr. Stephen with an investment of $20,000
- A loan of $30,000 was obtained from a bank by the company
- Printers were procured by the company after the payment of $1,000
- $500 in Cash was received after the company offered its services
- $750 were charged for rendered services on account
- Office supplies were procured on account for $200
- The equipment was repaired for $400 and was liable to be paid in a fortnight
- Stephen, the owner of the business, withdrew $5,000 in cash in terms of his personal expenses
- About 33% of the load obtained in the Transaction No. 2 was returned
- Customer payment was received for the services offered in Transaction No. 5
You can see the effects to the expanded accounting equation in the table given below:
You can see that the equation remains balanced. The total of the right hand side of the equation is $36,450 which is equal to that of the assets in the left hand side.
Go through the above examples and figure out what particular items were affected under each element and why their quantity was increased or decreased. Try to do it one transaction at a time. If you find it difficult, you may refer to this lesson.
The accounting equation in both basic and expanded form represents the relationship between the assets in the left hand side and liabilities plus capital in the right hand side. It also portrays that the resources owned by the company are coupled with claims against them.
You can see that each transaction is affected in a couple of ways. Consequently, we can view the movement of at least two accounts in the accounting equation. The amount of change in the left hand side of the expanded accounting equation is always equal to that in the right hand side; thereby keeping the equation balanced at all times.
The accounting equation is of paramount importance. It will assist you in comprehending associated accounting principles and guide you in solving numerous accounting problems.