## Definition: Expanded Accounting Equation

## What is the Expanded Accounting Equation?

The

The

*Expanded Accounting Equation*is the*Accounting Equation*with more detail. The*Expanded Accounting Equation*generally shows Equity equaling Contributions minus Withdrawals plus Income minus Expenses. In order to understand the*Expanded Accounting Equation*, you need to understand the simple form of the*Accounting Equation*.The

*Expanded Accounting Equation*and the*Accounting Equation*summarizes the relationship of property and ownership, such that the total amount of property in a business equals the total amount of ownership of the property. A simple form of the*Accounting Equation*is Property = Ownership. Since property can be owned by owners and lenders, the*Accounting Equation*can be written as Property = Third-Party Ownership + Owner Ownership. The following figure summarizes the*Accounting Equation*:Here is an example of using the

Property = Third-Party + Owner

$10,000 = $4,000 + $6,000

$10,000 = $10,000 (balanced)

In formal accounting terms, the

*Accounting Equation*. Let's say a business has $10,000 of cash property, where $4,000 of the cash was obtained from a loan and $6,000 is owned by the owners of the business. The*Accounting Equation*would calculate this as:*Accounting Equation*Property = Third-Party + Owner

$10,000 = $4,000 + $6,000

$10,000 = $10,000 (balanced)

In formal accounting terms, the

*Accounting Equation*uses Assets as property, Liabilities as third-party ownership and Equity as owner ownership. This gives us the formal version of the*Accounting Equation*:If we use the same example of the

Assets = Liabilities + Equity

$10,000 = $4,000 + $6,000

$10,000 = $10,000 (balanced)

The Expanded Accounting Equation gives us more detail about the Equity portion of ownership. Equity is equal to what an owner invests into their company, minus what the owner takes out, plus any profit they make. Profit is equal to income minus expenses. Let's say that the owner in the preceding example invested $1,500 cash into their business and withdrew $500. Let's also say the business made a profit of $5,000, $10,000 of income and $5,000 of expenses. The

Assets = Liabilities + Contributions - Withdrawals + Income - Expenses

$10,000 = $4,000 + $1,500 - $500 + $10,000 - $5,000

$10,000 = $4,000 + $6,000

$10,000 = $10,000 (balanced)

The formal version of the

*Accounting Equation*above, we get:*Accounting Equation*Assets = Liabilities + Equity

$10,000 = $4,000 + $6,000

$10,000 = $10,000 (balanced)

The Expanded Accounting Equation gives us more detail about the Equity portion of ownership. Equity is equal to what an owner invests into their company, minus what the owner takes out, plus any profit they make. Profit is equal to income minus expenses. Let's say that the owner in the preceding example invested $1,500 cash into their business and withdrew $500. Let's also say the business made a profit of $5,000, $10,000 of income and $5,000 of expenses. The

*Expanded Accounting Equation*would show this as:*Expanded Accounting Equation*Assets = Liabilities + Contributions - Withdrawals + Income - Expenses

$10,000 = $4,000 + $1,500 - $500 + $10,000 - $5,000

$10,000 = $4,000 + $6,000

$10,000 = $10,000 (balanced)

The formal version of the

*Expanded Accounting Equation*and the*Accounting Equation*use account balances to calculate a value for Assets, Contributions, Withdrawals, Income and Expenses. The following figure shows the*Expanded Accounting Equation -*"d" means "debit", "c" means "credit", "+" means an increase and "-" means a decrease.The term "debit" refers to the act of "receiving" and the term "credit" refers to the act of "giving".

If you want to understand the meanings of debit and credit,

If you want to understand the meanings of debit and credit,

**check out the definition of debit and credit**.## The Expanded Accounting Equation & The Balance Sheet

The

*Expanded Accounting Equation*is used to create a business's Balance Sheet statement. The Balance Sheet statement details a business's assets and liabilities, but does not detail any equity because equity is shown using the business's Profit/Income statement and Owner Equity statement. It is called a Balance Sheet statement because it uses the*Expanded Accounting Equation*to calculate the equality between property and ownership. These two values must balance (equal) one another or a mistake would have been made. In the*Expanded Accounting Equation*, every cent of property and ownership must be accounted for and must equal one another.## Continue Learning in an Interactive-Accounting Textbook

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The

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