Expanded basic accounting equation is the elongated version of basic accounting equation. It just illustrates in detail the different components of shareholder’s equity of the company. It expands the role of equity in the basic accounting equation from:
ASSETS= LIABILITIES + SHAREHOLDER’S EQUITY
*Contributed capital is the capital provided by original shareholders (paid-in capital)
*Retained earnings are the earnings not distributed to the shareholders from the previous year.
*Dividends are subtracted since they are earnings distributed to shareholders of the company.
Contributed capital and dividends show the effect of transactions with the shareholders. The difference between revenue generated and expenses incurred reflects the effect of net income of equity shareholders. It is necessary that your accounting equation balance because, if it does not, your financial will not make sense or enable you to keep track of your financial transactions. The basic purpose of calculating expanded accounting cycle is to represent the company status.