The expanded accounting equation replaces Owner's Equity in the basic accounting equation (Assets = Liabilities + Owner's Equity) with the following components: Owner's Capital + Revenues – Expenses – Owner's Draws. In other words, the expanded accounting equation for a sole proprietorship is: Assets = Liabilities + Owner's Capital + Revenues – Expenses – Owner's Draws.
In the expanded accounting equation for a corporation, Stockholders' Equity in the basic accounting equation (Assets = Liabilities + Stockholders' Equity) is replaced by these components: Paid-in Capital + Revenues – Expenses – Dividends – Treasury Stock. The resulting expanded accounting equation for a corporation is: Assets = Liabilities + Paid-in Capital + Revenues – Expenses – Dividends – Treasury Stock.
The expanded accounting equation allows you to see separately (1) the impact on equity from net income (increased by revenues, decreased by expenses), and (2) the effect of transactions with owners (draws, dividends, sale or purchase of ownership interest).
