Expanded accounting equation -Everything you need to know

What is the extended accounting equation? Definition, Examples

Extended Accounting Equation refers to the extended version of the basic accounting equation for the particular company/sole proprietor, giving detailed information regarding the firm’s financial transactions such as assets, liabilities, equity capital, income, expenses and withdrawals.

The extended accounting equation generally varies across business forms. The equation is slightly different in the case of a Proprietorship, Partnership, and Corporation.

For the property concern, the equation would be:

Assets = Owner’s Capital – Drawings + Liabilities + Income – Expenses

For the partnership firm, the equation will be:

Assets = Partner’s Capital – Distributions + Liabilities + Income – Expenses

For the foundation, the equation will be:

Assets = Shareholders’ Equity + Retained Earnings

Extended Accounting Equation = Paid-in Capital – Treasury Stock (if any) + Liabilities + Income – Expenses – Dividends

  • Shareholders’ equity is the total paid-up capital of the organization, reduced through treasury shares. Treasury stock means the amount of stock the organization had earlier issues in but subsequently repurchased/repurchased.
  • are accessed Retained earnings by reducing expenses and earnings earnings from revenue.

An example of an extended accounting equation

You can download this Extended Accounting Equation Excel Template here – Extended Accounting Equation Excel Template

Let’s take the example of Foods & Drugs Inc.. The company was incorporated on June 1, 2019 with a paid-in capital of 1,000 shares of $50. During the first quarter of its operations, the company entered into the following transactions:

Solution

The table below provides the separation of the above details under specific headings:

  • Assets = Paid-up Capital – Treasury Stock (if any) + Liabilities + Income – Expenses – Dividends
  • Assets = 50000 – 0 + 0 + 63000 – (-110200) – (-1000)
  • = 1800

Relevancy and Usage

It is an important concept from the point of view of accounting because it provides a picture of the financial well-being of the organization. The accounting equation not only includes information from the balance sheet, but also provides information about the income and expense statement.

As we saw in the example above, the net result of the extended accounting equation is that the company’s assets equal the net effect of equity, liabilities and net profit. A balanced equation also ensures the fact that the entire accounting process has been followed correctly. It also helps to reinforce the fact that all debit and credit entries relating to all transactions entered during the period are taken into account.

It basically shows the impact of each transaction that takes place and how it affects the obligations the company may have. Further, it also details the aspects of any increase in cash flows on account of revenue earned or any decrease in cash flows on account of expenses incurred to operate the operations.

The equation is used by organizations to understand the overall and descriptive picture of the financial statement. It can be used to delve into the financial transactions of the organization and thus also in the detailed analysis of the financial statements.

It is used by professionals to understand the effectiveness of the accounting policies followed by the organization.

conclusion

The expanded accounting equation not only provides a detailed view of the financial statements, but also shows the effectiveness of the accounting policies applied. Moreover, from a professional point of view, it provides a glimpse into the financial well-being and net worth of the enterprise

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