# Understand the Expanded Accounting Equation: Detailed Definition & Formula

## What Is the Expanded Accounting Equation?

The expanded accounting equation is an extension of the basic [accounting equation](https://www.investopedia.com/terms/a/accounting-equation.asp) that gives more detail about [stockholders' equity](https://www.investopedia.com/terms/s/stockholdersequity.asp). It shows how equity is made up of things like capital and retained earnings. It also helps explain whether profits are paid out as dividends or reinvested back into a business. This makes it a useful tool for financial analysis because it gives a clearer picture of a company’s overall financial health.

### Key Takeaways

*   The expanded accounting equation breaks down equity into contributed capital, retained earnings, revenue, and dividends.  
    
*   It helps analysts understand how profits are utilized—whether dividend payouts, reinvestment, or retention.  
    
*   The expanded equation provides more detailed insights than the basic accounting equation.  
    
*   It's applicable to various entity structures with different terminologies, like "members' capital" for partnerships.  
    
*   Real-world examples, like Exxon Mobil and Apple, demonstrate its practical application in financial statements.  
    

## Understanding the Expanded Accounting Equation Formula 

The expanded accounting equation explains equity's role in the basic equation. The common form of the accounting equation is:

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

The expanded accounting equation decomposes equity into component parts:

> $\begin{aligned}&\text{Assets} = \text{Liabilities} + \text{CC} + \text{BRE} + \text{R} - \text{E} - \text{D} \\&\textbf{where:}\\&\text{CC} = \text{Contributed Capital, capital provided by} \\&\text{the original stockholders (also known as Paid-In Capital)} \\&\text{BRE} = \text{Beginning Retained Earnings, earnings not} \\&\text{distributed to stockholders from the previous period} \\&\text{R} = \text{Revenue, what's generated from the ongoing} \\&\text{operation of the company} \\&\text{E} = \text{Expenses, costs incurred to run operations of} \\&\text{the business} \\&\text{D} = \text{Dividends, earnings distributed to the stockholders} \\&\text{of the company}\end{aligned}$
> 
> ## Breaking Down the Functionality of the Expanded Accounting Equation
> 
> Sometimes, analysts want to better understand the composition of a company's shareholders' equity. Beyond assets and liabilities, stockholders' equity includes these elements:
> 
> *   **Contributed capital:** This is the capital provided by the original stockholders (also known as [paid-in capital](https://www.investopedia.com/terms/p/paidincapital.asp)).
> *   **Beginning retained earnings:** [Retained earnings](https://www.investopedia.com/terms/r/retainedearnings.asp) 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](https://www.investopedia.com/terms/c/contributed-capital.asp) and dividends show stockholder transaction effects. The gap between revenue, profit, and expenses shows [net income's](https://www.investopedia.com/terms/n/netincome.asp) effect 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" is used in partnerships and "owners' capital" in [sole proprietorships](https://www.investopedia.com/terms/s/soleproprietorship.asp); "distributions" and "withdrawals" replace "[dividends](https://www.investopedia.com/articles/fundamental/03/102903.asp)."
> 
> > **Fast Fact**
> >
> > Revenues and expenses are often reported on the balance sheet as "net income."
> 
> ## Practical Applications: Expanded Accounting Equation in Action 
> 
> ### Exxon Mobil
> 
> Let's look at an actual historical example. Below is a portion of Exxon Mobil Corporation's [(XOM)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=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.
> 
> The expanded equation helps us see impacts from reinvested earnings ($419,155), other 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.
> 
> ![](https://www.investopedia.com/thmb/-zNsKYm_o-RnyfDc6zbSgr78jO0=/774x0/filters:no_upscale():max_bytes(150000):strip_icc()/Clipboard02-5c6ecfab46e0fb0001b6815b.jpg)
> 
> *XOM Balance Sheet.*
> 
> ### 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, 2021, 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.
> 
> Substituting 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.
> 
> ## What Is the Expanded Accounting Equation?
> 
> The expanded accounting equation is a form of the basic accounting equation that includes the distinct components of owner's equity, such as dividends, shareholder capital, revenue, and expenses. The expanded equation is used to compare a company's assets with greater granularity than provided by the basic equation.
> 
> ## What Is the Basic Accounting Equation?
> 
> The basic accounting equation is used to calculate how much a company is worth, based on the amount of money that has already been invested and the cost of any obligations. The formula for the basic accounting equation is as follows:
> 
>   
> 
> *   Assets = Liabilities + Owner’s Equity
> 
>   
> 
> ## When Should I Use the Basic Accounting Equation?
> 
> The basic accounting equation is used to provide a simple calculation of a company's value, based on a comparison of equity and liabilities. For a more specific breakdown of the components of equity, use the expanded equation instead.
> 
> ## The Bottom Line
> 
> The expanded accounting equation breaks down a company’s stockholders’ equity into more detail. It shows whether profits are used as dividends, reinvested, or retained in the business. This gives a clearer view of a company’s financial health. The expanded version of the equation includes items like contributed capital, retained earnings, revenue, expenses, and dividends. Real-world examples, such as Exxon Mobil and Apple, show how these pieces appear on balance sheets and can explain a company’s overall financial position.  

> **Article Sources**
>
> 1.  Exxon Mobil. "[SEC Form 10-Q for the Quarterly Period Ended September 30, 2018](https://ir.exxonmobil.com/node/29096/html)." Accessed Jan. 5, 2022.
>     
> 2.  Apple, Inc. "[SEC Form 10-Q for the Quarterly Period Ended June 26, 2021](https://d18rn0p25nwr6d.cloudfront.net/CIK-0000320193/644f2acd-61fa-4267-b3fb-4e88b2c2762c.pdf)." Pages 6-7. Accessed Jan. 5, 2022.