Expanded Accounting Equation
Expanded
Accounting Equation is just the further explanation of Owners’ Equity. The
Original Accounting Equation is:Assets = Liabilities + Owners’ Equity
Assets = Liabilities + Owners’ Equity + Revenues - Expenses - Drawings
We know that all
the Expenses and Revenues are the results of profitable activities of the
business carrying on by the Owner / Entrepreneur or Firm or Company.
Also, all
expenses are incurred for the purpose of earning revenue and ultimately
business gets legal profits. Expenses decreases the Owners’ Equity and Income
increases it.
An owner of the
business also draws some amount from the business for his / her personal use
that is known as Drawings.
Expanded
Accounting Equation for a Company / Corporation is:
Assets = Liabilities + Paid-UP-Capital + Revenues - Expenses - Dividends - Treasury Stock
Paid-UP-Capital
is the shares issued to the shareholders.
Dividends are the
shares of profits distributed by the company or corporation to shareholders.
Treasury Stock or Treasury Shares are those shares that a
corporation retained in its Treasury. It is reacquired by the issuing company
from the shareholders in case of idle cash and would retire or resell in the
public later on.
1. Mr. A Purchased goods worth Rs. 5000 from Mr. B for Cash, then there is two accounts involved in this Business Transaction. One is a Purchases Account that is a direct expense and it affects the Owner's Equity side as it the result of profitable activities of owner of the business while Cash Account is a Current Asset which affects the asset side by Rs. 5000. Also Purchases is increasing, so it decreases the Owner's Equity Side while Cash is decreasing so it decreases the asset side of Expanded Accounting Equation.
2. Suppose Mr. Sold goods worth Rs. 10000 To his customer on Cash Basis. Then in this business transaction, there are two accounts involved in it. One is Cash that is increasing and other one is Sales Account which is a direct revenue and it is also increasing, so we credit it. Morerover, Cash is increasing, so it increases the Asset side by Rs. 10000 while Sales is also increasing so it increases the Owner's Equity side as it is the profitable contribution of owner of the business.
Examples:
1. Mr. A Purchased goods worth Rs. 5000 from Mr. B for Cash, then there is two accounts involved in this Business Transaction. One is a Purchases Account that is a direct expense and it affects the Owner's Equity side as it the result of profitable activities of owner of the business while Cash Account is a Current Asset which affects the asset side by Rs. 5000. Also Purchases is increasing, so it decreases the Owner's Equity Side while Cash is decreasing so it decreases the asset side of Expanded Accounting Equation.
2. Suppose Mr. Sold goods worth Rs. 10000 To his customer on Cash Basis. Then in this business transaction, there are two accounts involved in it. One is Cash that is increasing and other one is Sales Account which is a direct revenue and it is also increasing, so we credit it. Morerover, Cash is increasing, so it increases the Asset side by Rs. 10000 while Sales is also increasing so it increases the Owner's Equity side as it is the profitable contribution of owner of the business.
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