accounting equation expanded

The expanded accounting equation shows how each part of owners’ equity (capital) is affected by different business activities.

🧾 Basic Accounting Equation:
Assets
=
Liabilities
+
Owner’s Equity
Assets=Liabilities+Owner’s Equity
🔍 Expanded Accounting Equation:
Assets
=
Liabilities
+
Owner’s Capital
+
Revenues
−
Expenses
−
Drawings
Assets=Liabilities+Owner’s Capital+Revenues−Expenses−Drawings
🧩 Explanation of Each Term:
Element Description
Assets Resources owned by the business (Cash, Accounts Receivable, Equipment, etc.)
Liabilities Amounts owed to outsiders (Loans, Accounts Payable, etc.)
Owner’s Capital Initial and additional investments made by the owner
Revenues (Income) Money earned from business activities (Sales, Service Income, etc.)
Expenses Costs incurred to earn revenue (Rent, Salaries, Utilities, etc.)
Drawings (Withdrawals) Money or goods the owner takes out for personal use
💡 In Simple Words:

Every rupee owned by the business (Assets) comes from either

creditors (Liabilities), or

the owner (Owner’s Equity),
which itself is affected by profit/loss and drawings.

📘 Example:

If a business has:

Assets = ₹200,000

Liabilities = ₹80,000

Owner’s Capital = ₹100,000

Revenue = ₹50,000

Expenses = ₹20,000

Drawings = ₹10,000

Then:

Assets
=
Liabilities
+
(
Capital
+
Revenue
−
Expenses
−
Drawings
)
Assets=Liabilities+(Capital+Revenue−Expenses−Drawings)
200
,
000
=
80
,
000
+
(
100
,
000
+
50
,
000
−
20
,
000
−
10
,
000
)
200,000=80,000+(100,000+50,000−20,000−10,000)
200
,
000
=
200
,
000
✅
200,000=200,000✅