Expanded Accounting Equation
Accounting glossary · Understand, connect, apply
The expanded accounting equation shows how owner contributions, withdrawals, revenue and expenses change equity. For a simple sole proprietorship: Assets = Liabilities + Opening capital + Investments + Revenue – Expenses – Drawings.
Example
Starting equity of $5,000 plus $2,000 revenue less $800 expenses and $200 drawings gives closing equity of $6,000, with no new investment.
Remember the difference
Corporate presentations use share capital, retained earnings and dividends instead. Do not double-count profit already included in capital.
Examples are simplified for learning. Where a term depends on US law, IFRS, US GAAP or a historical rule, check the context explained above and the requirements relevant to your course.
Study references: OpenStax financial accounting and managerial accounting. For reporting requirements, consult the applicable IFRS Standards or FASB guidance. US tax terms should be checked against the relevant tax-year IRS instructions.
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