What is Expanded Accounting Equation?
Expanded Accounting Equation is basically one of the accounting equation which gives details and basic information about all the elements of Stockholder’s Equity. Expanded Equation develops the role and importance of Equity in accounting terms.
What is owner’s equity made up of?
The owner’s/Proprietor Equity involve some basic components which include :
- Owner’s Capital
- Annual Returns
- Expenditures and Drawings
The basic Accounting Equation to denote the accounting facts and figures include :
- Assets
- Liabilities
- Owner Equity
and the accounting Equation is Assets = Liabilities + Owner’s Equity but after expanding this equation further changes have been seen to evaluate the accounting position which includes:
| ASSETS = LIABILITIES + CAPITAL + REVENUE – EXPENSES – OWNER’S DRAWINGS |
The above equation revealed the equation calculation in terms of Proprietor business, but if you want to determine the Shareholder’s Equity in any corporation in such case different equation is used which may carry Dividends and Treasury Stock. Now the Equation used in any corporation include:
| ASSETS = LIABILITIES + PAID IN CAPITAL + REVENUE – EXPENDITURE – DIVIDENDS – TREASURY STOCK |
Expanded accounting Equation is simply the expansion of fundamental/ Standard Accounting term in form of a revised equation which shows components relating to Owner’s Equity. The Expansion does not include expanded Assets and Liabilities but by involving some elements which describe the role of Owner’s equity in the business. For carrying any business operation it is essential to develop and evaluate exact figures from this expanded equation because it helps to know the relationship between Income Statement and the Balance Sheet as it carries all the details of facts and figures of Financial Statements.
When any businessman makes a recording of its transactions in final accounting statements in such case to evaluate the exact results and financial position of the company it becomes necessary to undertake calculation of Expanded Accounting Terms. Moreover, it is also essential to understand that the elements of Equity are different from Proprietorship Business, Partnership and also from corporations. So the above two equations show that every business type must use different expanded equation. The business organizations keep accounting equations because these equations clearly show the accurate amount of facts and figures thus help to determine appropriate business position.
Fundamental Equation or Standard Equation shows the relationship of accounting elements but it does not specify the role of Owner’s Equity, however, the basic difference of fundamental and Expanded Accounting Equation is the expansion part of Capital because in expanded version of an equation the Capital includes –
- Contributions
- Withdrawals
- Incomes and Expenditures
The expanded accounting Equation is nothing but a just extension to components of a basic equation and it does not give any impact to figures of assets and liabilities sections because they remain constant in both ways. Expanded Equity gives a clear picture of two basic terms of creating equity that may involve: Investor’s Contribution and Profits of the Company. Because these are general components that affect the equity of the company because once the shareholder leaves the organization equity may get decreased on the other hand the company face Losses.
Let us take a suitable example to understand the concept of Expanded Equation in a better way.
Assume the following Transactions:
- Mr. Joy invested $40,000 to start a Soft drink Business.
- The company took a loan from the bank, $60,000.
- Company Purchased inputs worth $2,000.
- Received Cash after rendering services, $1,000.
- Mr. Joy Withdrew $10,000 for personal use.
- Purchased Office equipment for $400.
- Equipment Repair for $400 and to be paid after 10 days.
Effects of above transactions in form of Expanded Equation:
| A | = | L | + | C | – | W | + | INC. | – | EXP. | |
| 1 | 40,000 | = | + | 40,000 | – | + | – | ||||
| 2 | 60,000 | = | 60,000 | + | – | + | – | ||||
| 3 | 2,000
(2,000) |
= | + | – | + | – | |||||
| 4 | 1,000 | = | + | – | + | 1,000 | – | ||||
| 5 | (10,000) | = | + | – | 10,000 | + | – | ||||
| 6 | 400 | = | 400 | + | – | + | – | ||||
| 7 | = | 400 | + | – | + | – | 400 | ||||
| Bal | 91,400 | = | 60,800 | + | 40,000 | – | 10,000 | + | 1,000 | – | 400 |
Thus above equations show the result of the equation on both sides is – $91,400. However, the Expanded Equation can also be used for evaluating the missing amount from the accounting figures. EssayCorp is known for providing quality assignment help to the students.
