Accounting Equation

The owner's equity in the basic accounting equation is sometimes expanded to show the accounts that make up owner's equity: Owner's Capital, Revenues, Expenses, and Owner's Draws.

Instead of the accounting equation, Assets = Liabilities + Owner's Equity, the expanded accounting equation is:

Assets = Liabilities + Owner's Capital + Revenues – Expenses – Owner's Draws

The eight transactions that we had listed under the basic accounting equation Transaction 8, are shown in the following expanded accounting equation:

	Assets	=	Liabilities	+	Owner's Capital	+	Revenues	–	Expenses	–	Owner's Draws
1	+   10,000	=		+	+   10,000
2	–        100	=								–	+        100
3	+     5,000   –     5,000	=
4	+     7,000	=	+     7,000
5	–        600	=						–	+        600
6	+        900	=				+	+        900
7		=	+        120					–	+        120
8	+        500   –        500	=
T	17,200	=	7,120	+	10,000	+	900	–	720	–	100

With the expanded accounting equation, you can easily see the company's net income:

Revenues	$900
– Expenses	720
Net Income	$180

The stockholders' equity part of the basic accounting equation can also be expanded to show the accounts that make up stockholders' equity: Paid-in Capital, Revenues, Expenses, Dividends, and Treasury Stock.

Instead of the accounting equation, Assets = Liabilities + Stockholders' Equity, the expanded accounting equation is:

Assets = Liabilities + Paid-in Capital + Revenues – Expenses – Dividends – Treasury Stock

The eight transactions that we had listed under the basic accounting equation Transaction C8 are shown in the following expanded accounting equation:

	Assets	=	Liabilities	+	Paid-in Capital	+	Revenues	–	Expenses	–	Dividends & Treasury Stock
1	+   10,000	=		+	+   10,000
2	–        100	=								–	+        100
3	+     5,000   –     5,000	=
4	+     7,000	=	+     7,000
5	–        600	=						–	+        600
6	+        900	=				+	+        900
7		=	+        120					–	+        120
8	+        500   –        500	=
T	17,200	=	7,120	+	10,000	+	900	–	720	–	100

With the expanded accounting equation, you can easily see the corporation's net income:

Revenues	$900
– Expenses	720
Net Income	$180

Because the material covered here is considered an introduction to this topic, many complexities have been omitted. You should always consult with an accounting professional for assistance with your own specific circumstances.

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