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Expanded Accounting Equation: Definition, Formula, How It Works

Published on 04 Apr, 22 by Raja Shazli

assets $

Sold T- shirts for $1,000, the cost of those T-shirts were $700. Mr. John invested a capital of $15,000 into his business. Service companies do not have goods for sale and would thus not have inventory. Merchandising and manufacturing businesses do have inventory. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.

  • Viewed another way, the company has assets of $16,300 with the creditors having a claim of $7,000 and the owner having a residual claim of $9,300.
  • Consider the following accounts and identify each as an asset​ , liability​ , or equity​ .
  • The accounting equation reflects that one asset increases and another asset decreases.
  • Begin by selecting the formula for the expanded accounting equation.

Some common examples of liabilities include accounts payable, notes payable, and unearned revenue. The accounting equation emphasises a basic idea in business; that is, businesses need assets in order to operate. There are two ways a business can finance the purchase of assets. First, it can sell shares of its stock to the public to raise money to purchase the assets, or it can use profits earned by the business to finance its activities. Second, it can borrow the money from a lender such as a financial institution.

Expanded Accounting Equation - Explained

Also, learn how to calculate revenue in accounting using the revenue formula and review the expenses formula. We've left out the other sections of this particular income statement because we don't need them to calculate this missing account. We only need the specific section where the missing account is found.


Viewed another way, the has assets of $16,300 with the creditors having a claim of $7,000 and the owner having a residual claim of $9,300. Although owner’s equity is decreased by an expense, the transaction is not recorded directly into the owner’s capital account at this time. Instead, the amount is initially recorded in the expense account Advertising Expense and in the asset account Cash. The accounting equation remains in balance since ASC’s assets have been reduced by $100 and so has the owner’s equity. Accounts are then used to prepare the balance sheets and income statements throughout the accounting periods.

How to solve basic accounting equations with examples

You will learn about other as you progress through the book. Let’s now take a look at the right side of the accounting equation.

  • ASC’s liabilities increase by $120 and the expense causes owner’s equity to decrease by $120.
  • Essentially, anything a business owes and has yet to pay within a period is considered a liability, such as salaries, utilities, and taxes.
  • The section of the basic equation which contains both the assets and liabilities remains unchanged in the expanded equation.
  • The financial statements are prepared from the​ ________.
  • Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years.
  • The following extract was taken from the worksheet of Special Events Bakers for the year 2019.

Now you have expanded your business, you have suppliers of raw materials. You are not paying in cash but paying them after some time. So that will the payables which you have to say $4000.

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