Question

Give an expanded version of the Accounting Equation that breaks down the components of Stockholder's Equity. What are the normal balances (debit or credit) of the components of your accounting equation?

Answer 1

The expanded accounting equation is derived from the common accounting equation and illustrates in detail the different components of stockholders’ equity of a company. It expands the equity role in the basic accounting equation from:

Assets = Liabilities + Equity

Assets = All current Assets + All Noncurrent (Fixed) Assets

Liabilities = All current Liabilities + All Noncurrent (Long term) Liabilities

Equity = Contributed Capital + Retained Earnings + Revenue - Expenses - Dividend distributed

Assets = Liabilities + Contributed Capital + Retained Earnings at the begining of the year + Revenue - Expenses - Dividend distributed

Assets (Current) = Debit (As assets/Receivable for the company)

Assets (Noncurrent) = Debit (As assets/Receivable for the company)

Liability (Current) = Credit (As Liability/Payable for the company - Company need to pa)

Liability (Noncurrent) = Credit (As Liability/Payable for the company - Company need to pay)

Contributed Capital = Credit (As company need to pay this to the equity holder/owner)

Retained Earnings = Credit (As company need to pay this to the equity holder/owner)

Revenue = Credit (As company need to pay this to the equity holder/owner)

Expenses = Debit (As company need to recover/Set off against profit)

Dividend distributed = Debit (As distributed to the shareholder)