Expanded Accounting EquationFormula, Examples and How to Calculate!

Written By:
Lisa Borga

The expanded accounting equation breaks down the equity part of the accounting equation to show more detail.

The more detailed equity section allows businesses to see how changes in revenue and expenses affect equity.

It also allows businesses to see what is being done with their profits, such as whether they are being invested, kept as cash, or paid out as dividends.

The Expanded Accounting Equation

The expanded accounting equation breaks down the equity portion of the equation to show it in more detail.

This is the expanded accounting equation:

Assets = Liabilities + Share Capital + Retained Earnings

Assets = Liabilities + CC + BRE + R – E – D

Where:

CC = Contributed Capital

BRE = Beginning Retained Earnings

R = Revenue

E =  Expenses

D = Dividends

Understanding the Expanded Accounting Equation

The expanded accounting equation is useful for those who want a more detailed understanding of a business’s stockholders’ equity.

This equation still includes assets and liabilities but expands stockholders’ equity into five elements.

These are:

• Beginning Retained Earnings:
  Earnings that are kept instead of being distributed to shareholders in the previous accounting period are retained earnings.
• Contributed Capital:
  These are the funds that are invested in a business by the shareholders in exchange for stock.
• Expenses:
  Expenses are the money a business spends in order to generate revenue.
• Dividends:
  Dividends are the part of earnings that are distributed to stockholders, so they are subtracted from equity.
• Revenue:
  This is the income a business generates from its operations.

Through the expanded accounting equation, investors and analysts can better see the effect of any transactions with shareholders by looking at their contributed capital and dividends.

The effect of net income can be seen by looking at the difference between expenses and losses that have been incurred and any profit or revenue that the business has generated.

This makes the expanded accounting equation useful for examining changes in a business’s shareholders’ equity between accounting periods.

Different entities tend to use different terminology as part of this equation.

Dividends may be called withdrawals or distributions depending on the structure of a business.

Equity can also have different terminology.

Members’ capital is commonly used for partnerships, and owner’s capital is typically used for sole proprietorships.

Additionally, expenses and revenue are typically recorded as net income on a business’s balance sheet.

Expanded Accounting Equation Examples

We will now look at two examples.

Example One

We are going to use the expanded accounting equation to look at a real-world company.

We are going to look at Walmart.

Walmart had:

• Total assets of $252,496 million
• Total liabilities of $164,965 million
• Total equity of $87,531 million

We can use the accounting equation as follows.

Assets = Liabilities + Shareholders’ Equity

$252,496 = $164,965 + $87,531

This equation shows total assets as of January 31, 2021.

By looking at the expanded accounting equation, we could see what effect reinvested earnings, and other comprehensive losses had on equity.

Example Two

Now, we will look at AT&T.

AT&T had:

• Total assets of $525,761 million
• Total liabilities of $346,521 million
• Total equity of $179,240 million

The Stockholders’ Equity section of AT&T is divided into the following sections:

• Preferred stock ($1 par value, 10,000,000 authorized):
• Series A (48,000 issued and outstanding at December 31, 2020
• Series B (20,000 issued and outstanding at December 31, 2020
• Series C (70,000 issued and outstanding Common stock ($1 par value, 14,000,000,000 authorized at December 31, 2020
• Common stock ($1 par value, 14,000,000,000 authorized at December 31, 2020): $7,621 million
• Additional paid-in capital: $130,175 million
• Retained earnings: $37,457 million
• Treasury stock 494,826,583 at December 31, 2020: ($17,910 million)
• Accumulated other comprehensive income : $4,330 million
• Non-controlling interest: $17,567 million

If these figures are substituted into the expanded accounting equation and totaled, and we add liabilities to this figure, we will obtain AT&T’s total assets.

What is the Basic Accounting Equation?

The basic accounting equation is a tool that allows businesses to see the financial status of their business at a specific point in time.

By using the basic accounting equation, businesses can look at how much money has been invested in the company along with how much money the company owes and see what the business is worth.

The basic accounting equation is:

Assets = Liabilities + Owner’s Equity

When Should the Basic Accounting Equation Be Used?

Businesses should use the basic accounting equation when they want to see a basic calculation of their value by comparing their liabilities to their equity.

If a company would like more detail, it should use the expanded accounting equation.

Key Takeaways

• The expanded accounting equation uses the basic accounting equation and breaks the equity section down into additional parts.
• The sections of equity in the expanded accounting equation are retained earnings, revenue minus dividends, and contributed capital.
• The expanded accounting equation still includes total liabilities and total assets.
• The terminology businesses use in their expanded accounting equation varies depending on the organization of their balance sheet.