What Is the Expanded Accounting Equation?

The expanded accounting equation is derived from the common accounting equation and illustrates in greater detail the different components of stockholders' equity in a company.

By decomposing equity into component parts, analysts can get a better idea of how profits are being used—as dividends, reinvested into the company, or retained as cash.

Key Takeaways

  • The expanded accounting equation is the same as the common accounting equation but decomposes equity into component parts.
  • The components of equity include contributed capital, retained earnings, and revenue minus dividends.
  • Total assets and total liabilities are also accounted for.

The Formula for the Expanded Accounting Equation Is

The expanded version of the accounting equation details the equity role in the basic accounting equation. The common form of the accounting equation is:

Assets = Liabilities + Owner’s Equity where: Liabilities = All current and long-term debts and obligations Owner’s Equity = Assets available to shareholders after all liabilities \begin{aligned} &\text{Assets} = \text{Liabilities} + \text{Owner's Equity}\\ &\textbf{where:}\\ &\text{Liabilities} = \text{All current and long-term debts} \\ &\text{and obligations}\\ &\text{Owner's Equity} = \text{Assets available to shareholders} \\ &\text{after all liabilities}\\ \end{aligned} Assets=Liabilities+Owner’s Equitywhere:Liabilities=All current and long-term debtsand obligationsOwner’s Equity=Assets available to shareholdersafter all liabilities

The expanded accounting equation decomposes equity into component parts:

Assets = Liabilities + CC + BRE + R E D where: CC = Contributed Capital, capital provided by the original stockholders (also known as Paid-In Capital) BRE = Beginning Retained Earnings, earnings not distributed to stockholders from the previous period R = Revenue, what’s generated from the ongoing operation of the company E = Expenses, costs incurred to run operations of the business D = Dividends, earnings distributed to the stockholders of the company \begin{aligned}&\text{Assets} = \text{Liabilities} + \text{CC} + \text{BRE} + \text{R} - \text{E} - \text{D} \\&\textbf{where:}\\&\text{CC} = \text{Contributed Capital, capital provided by} \\&\text{the original stockholders (also known as Paid-In Capital)} \\&\text{BRE} = \text{Beginning Retained Earnings, earnings not} \\&\text{distributed to stockholders from the previous period} \\&\text{R} = \text{Revenue, what's generated from the ongoing} \\&\text{operation of the company} \\&\text{E} = \text{Expenses, costs incurred to run operations of} \\&\text{the business} \\&\text{D} = \text{Dividends, earnings distributed to the stockholders} \\&\text{of the company}\end{aligned} Assets=Liabilities+CC+BRE+REDwhere:CC=Contributed Capital, capital provided bythe original stockholders (also known as Paid-In Capital)BRE=Beginning Retained Earnings, earnings notdistributed to stockholders from the previous periodR=Revenue, what’s generated from the ongoingoperation of the companyE=Expenses, costs incurred to run operations ofthe businessD=Dividends, earnings distributed to the stockholdersof the company

How the Expanded Accounting Equation Works

Sometimes, analysts want to better understand the composition of a company's shareholders' equity. Besides assets and liabilities, which are part of the general accounting equation, stockholders' equity is expanded into the following elements:

  • Contributed capital: This is the capital provided by the original stockholders (also known as paid-in capital).
  • Beginning retained earnings: Retained earnings are the earnings not distributed to the stockholders from the previous period.
  • Revenue: This is what's generated from the ongoing operation of the company.
  • Expenses: These are costs incurred to run operations of the business.
  • Dividends: These are subtracted since they are the earnings distributed to the stockholders of the company.

Contributed capital and dividends show the effect of transactions with the stockholders. The difference between the revenue and profit generated and expenses and losses incurred reflects the effect of net income (NI) on stockholders' equity. Overall, then, the expanded accounting equation is useful in identifying at a basic level how stockholders' equity in a firm changes from period to period.

Some terminology may vary depending on the type of entity structure. "Members' capital" and "owners' capital" are commonly used for partnerships and sole proprietorships, respectively, while "distributions" and "withdrawals" are substitute nomenclature for "dividends."

Real-World Example of the Expanded Accounting Equation

Let's look at an actual historical example. Below is a portion of Exxon Mobil Corporation's (XOM) balance sheet as of September 30, 2018. 

  • Total assets were $354,628 (highlighted in green).
  • Total liabilities were $157,797 (1st highlighted red area).
  • Total equity was $196,831 (2nd highlighted red area).

The accounting equation whereby Assets = Liabilities + Shareholders' equity is calculated as follows:

  • Accounting equation = $157,797 (total liabilities) + $196,831 (equity) equal $354,628, which equals the total assets for the period.

We could also use the expanded accounting equation to see the effect of reinvested earnings ($419,155), other comprehensive income ($18,370), and treasury stock ($225,674). We could also look to XOM's income statement to identify the amount of revenues and dividends the company earned and paid out.

XOM Balance Sheet.