Expanded Accounting Equation Explained


is the advance version of basic accounting equation. It add accounts like Revenue, Expense and Drawings to the Equation. Let’s go back to the example we used above for contributed capital. You start a business by contributing $1,000 cash and a computer worth $500. What is the business giving in exchange for these assets? It is giving you $1,500 worth of capital in the business. When recording transactions, the accounting equation must stay balanced.

profit and loss

The total left side and the total right side of each accounting transaction must balance. Rule Of AccountingAccounting rules are guidelines to follow for registering daily transactions in the entity book through the double-entry system.

Accounting equation definition

As long as an organization follows the equation, it can report any type of transaction, even if it is fraudulent. The reason why the accounting equation is so important is that it is alwaystrue – and it forms the basis for all accounting transactions in a double entry system. At a general level, this means that whenever there is a recordable transaction, the choices for recording it all involve keeping the accounting equation in balance. The accounting equation concept is built into all accounting software packages, so that all transactions that do not meet the requirements of the equation are automatically rejected.

The shows the various units of stockholder equity in greater detail. As was previously stated, double-entry accounting supports the expanded accounting equation. Double-entry accounting is a fundamental concept that backs most modern-day accounting and bookkeeping tasks. The expanded accounting equation can be rearranged in many ways to suit its use better. With that being said, no matter how the formula is laid out, it must always be balanced. It breaks down net income and the transactions related to the owners (dividends, etc.). Shareholder equity is a company’s owner’s claim after subtracting total liabilities from total assets.

2 The effect of profit on the accounting equation

Before joining FSB, Eric has worked as a freelance content writer with various digital marketing agencies in Australia, the United States, and the Philippines. Eric is a staff writer at Fit Small Business and CPA focusing on accounting content. He spends most of his time researching and studying to give the best answer to everyone. On January 3, Joe purchased an office table for his company, which cost him $5,000. Additionally, you can use your cover letter to detail other experiences you have using the equation. For example, you can talk about how you checked that the books were balanced for a friend or family member’s small business.

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