Expanded accounting equation

Definition

The expanded accounting equation is an extension of the basic accounting equation, incorporating details about owner's equity components such as revenues, expenses, and dividends. This equation helps in better analyzing and recording transactions by providing a more detailed view of a company's financial position.

5 Must Know Facts For Your Next Test

1. The expanded accounting equation is: Assets = Liabilities + Owner's Capital - Owner's Withdrawals + Revenues - Expenses.
2. Owner's Capital increases with additional investments and profits from business operations.
3. Owner's Withdrawals are subtracted from Owner's Equity since they represent money taken out by the owner.
4. Revenues increase Owner's Equity while Expenses decrease it.
5. This equation is essential for understanding how different transactions affect the overall financial health of a business.

Review Questions

Related terms

Basic Accounting Equation: A fundamental formula representing that Assets equal Liabilities plus Owner’s Equity.

Owner’s Equity: The residual interest in the assets of an entity after deducting liabilities.

Double-Entry Accounting:

An accounting system where every transaction affects at least two accounts, ensuring that the accounting equation remains balanced.