Expanded accounting equation

Expanded accounting equation is modified version od basic accounting equation. It replaces owner's equity with more detailed data. The basic accounting equation is:

Assets = Liabilities + Owner's equity

The expanded accounting equation is:

Assets = Liabilities + Owner's capital + Revenues - Expenses - Owner's draws

Equation for stock market

In case of listed companies:

  • Owner's equity is replaced with Stockholder's Equity,
  • Owner's capital is replaced with Contributed capital,
  • Owner's draws are replaced with Dividends.

Why to use expanded accounting equation?

There are two main purposes of using expanded accounting equation:

  • better view of impact of net income on equity,
  • better view of results of transactions with owners.

References

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