The expanded accounting equation provides a more detailed illustration of a company’s financial health by breaking down the components of stockholders’ equity. By decomposing equity into its constituent parts, analysts can better understand how profits are allocated, whether as dividends, reinvested into the company, or retained as cash.
Key Takeaways
- The expanded accounting equation extends the basic accounting equation to include detailed components of equity.
- Equity components include contributed capital, retained earnings, and revenues minus dividends and expenses.
- The total accounts for assets and liabilities remain integral to the equation.
- Terminology may vary depending on a company’s balance sheet structure.
The Expanded Accounting Equation Formula
The expanded formula breaks down equity’s role within the accounting equation. The general 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
In its expanded form, the accounting equation becomes:
Assets = Liabilities + CC + BRE + R − E − D
where:
- CC (Contributed Capital): Capital provided by the original stockholders (also referred to as Paid-In Capital)
- BRE (Beginning Retained Earnings): Earnings not distributed to stockholders from the previous period
- R (Revenue): Income generated from ongoing operations
- E (Expenses): Costs incurred to run business operations
- D (Dividends): Earnings distributed to stockholders
How the Expanded Accounting Equation Works
Analysts often use the expanded accounting equation to delve into the nuances of a company’s stockholders’ equity, which includes:
- Contributed Capital: Provided by the original stockholders (also known as Paid-In Capital).
- Beginning Retained Earnings: The portion of earnings not distributed from the previous period.
- Revenue: Income generated from ongoing business operations.
- Expenses: Costs incurred to support the business operations.
- Dividends: Earnings distributed to stockholders.
The distinction between these components helps analysts understand how transactions with stockholders impact the financial state of the company. Variations in terminology may occur for different business types; for example, “members’ capital” and “owners’ capital” are often used respectively for partnerships and sole proprietorships.
Real-World Examples of the Expanded Accounting Equation
Exxon Mobil Historical Snapshot
Below is an excerpt from Exxon Mobil Corporation’s balance sheet as of September 30, 2018:
- Total assets: $354,628 million
- Total liabilities: $157,797 million
- Total equity: $196,831 million
According to the accounting equation:
Assets = Liabilities + Shareholders' Equity
therefore:
$354,628 = $157,797 + $196,831
Further analysis using the expanded equation could breakdown reinvested earnings ($419,155 million), other comprehensive income ($18,370 million), and treasury stock ($225,674 million).
Apple, Inc.’s Financial Snapshot
From Apple’s quarterly report on July 28, 2021, for the period ending June 26, 2021:
- Total Assets: $329,840 million
- Total Liabilities: $265,560 million
- Total Shareholder’s Equity: $64,280 million
The breakdown of Shareholder’s equity is:
- Common stock and additional paid-in capital: $54,989 million
- Beginning retained earnings: $15,261 million
- Net income: $21,744 million
- Dividends and Dividend equivalents: $3,713 million
- Share repurchases: $22,500 million
- Common stock withheld related to net share settlement of equity awards: $1,559 million
- Accumulated other comprehensive income: $58 million
These components, when substituted into the expanded accounting equation, confirm the calculated total assets.
Simplifying Accounting Equations for Better Financial Insight
What Is the Expanded Accounting Equation?
The expanded accounting equation delineates the distinct components of owner’s equity such as dividends, shareholder capital, revenue, and expenses, providing more granular financial insight.
What Is the Basic Accounting Equation?
The basic accounting equation provides an overview of a company’s worth based on its liabilities and owner’s equity:
Assets = Liabilities + Owner's Equity
When to Use the Basic vs. Expanded Accounting Equation?
Use the basic accounting equation for a quick, overarching view of a company’s value. For a detailed analysis of equity components, opt for the expanded accounting equation.
Related Terms: basic accounting equation, assets, liabilities, revenue, expenses.
References
- Exxon Mobil. “SEC Form 10-Q for the Quarterly Period Ended September 30, 2018”.
- Apple, Inc. “SEC Form 10-Q for the Quarterly Period Ended June 26, 2021”. Pages 6-7.
