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 澳洲幸运5官方开奖结果体彩网: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.

Th🏅e Formula for the Expanded Accounting Equation

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

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

The expanded accounting equation decomposes equity into component parts:ꦬ

$\begin{aligned}&\text{Assets} = \text{Liabilities} + \text{CC} + \text{BRE} + \text{R} - \text{E} - \text{D} \\&\textbf{where:}\\&\text{CC} = \text{Contributed Capital, capital provided by} \\&\text{the original stockholders (also known as Paid-In Capital)} \\&\text{BRE} = \text{Beginning Retained Earnings, earnings not} \\&\text{distributed to stockholders from the previous period} \\&\text{R} = \text{Revenue, what's generated from the ongoing} \\&\text{operation of the company} \\&\text{E} = \text{Expenses, costs incurred to run operations of} \\&\text{the business} \\&\text{D} = \text{Dividends, earnings distributed to the stockholders} \\&\text{of the company}\end{aligned}$​Assets=Liabilities+CC+BRE+R−E−Dwhere:CC=Contributed Capital,&꧙nbsp;capital provided bythe original stockhold🏅ers ꦬ;(also known as Paid-In Capital)BRE=Beginning Retained Eꦛarnings, earnings&nꦗbsp;notdistributed to stockholder𓂃s from the previous pꦯeriodR=Revenue, what’s generated&𝔉nb൲sp;from the ongoingoperation of the companyE=𒆙Expenses, costs incurred to run operations ofthe businessD=Divi🉐dends, earnings distri🉐buted 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 澳洲幸运5官方开奖结果体彩网:paid-in capital).
• Beginning retained earnings: 澳洲幸运5官方开奖结果体彩网: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.

澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:net income (NI) on stockholders' equity. Overall, t🐼hen, the expanded accounting equation is useful in id💧entifying 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 澳洲幸运5官方开奖结果体彩网:sole proprietorships, respectively, while "distributions" and "withdrawals" are substitute nomenclature for "澳洲幸运5官方开奖结果体彩网:dividends."

Real-World Examples ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚof the Expanded Accounting 🌺Equation

Exxon Mobil

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.&nb🅠sp;

• 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.

Apple, Inc.

For another example, consider the balance sheet for Apple, Inc., as published in the company's quarterly report on July 28, 2021.

For the quarter that ended on June 26, 202🎐1, the company reported the following balances (in USD millions):

• Total Assets: $329,840.
• Total Liabilities: $265,560.
• Total Shareholder's Equity: $64,280.

The components of Shareholder's equity are further divided on the consolidated financial statement (in millions):

• Common stock and additional paid-in capital: $54,989
• Beginning retained earnings: $15,261.
• Net income (revenue minus expenses): $21,744
• Dividends and Dividend equivalents: $3,713
• Share repurchases: $22,500. (treated as a dividend in the expanded equation, since these funds are effectively used to benefit shareholders).
• Common stock withheld related to net share settlement of equity awards: $1,559.
• Accumulated other comprehensive income: $58.

Substitutiಞng for the appropriate terms of the expanded accounting equation, these figures add up to the total declared assets for Apple, Inc., which are worth $329,840 million U.S. dollars.