The expanded accounting equation is a longer form of the accounting equation that shows the items making up owner's equity. For a sole proprietorship it is usually written as: Assets = Liabilities + Owner's capital − Owner's drawings + Revenue − Expenses. The main entry explains the basic form and why the two sides always balance.
What the extra terms show
The basic accounting equation, Assets = Liabilities + Equity, treats equity as one figure. The expanded version opens it up to show what increases and decreases it. Owner's capital is what the owner has put in. Drawings, recorded in a drawing account, are amounts the owner has taken out for personal use and reduce equity. Revenue increases equity and expenses reduce it, so their difference is the period's net income or loss.
The expanded form helps beginners see how a transaction affects the accounts. If a business earns $2,000 in cash fees, assets and revenue each rise by $2,000. If it pays $500 for supplies used, assets and equity each fall by $500 through expenses. The equation stays in balance after every entry.
For a corporation, the equity side is usually expanded differently: Assets = Liabilities + Contributed capital + Revenue − Expenses − Dividends, with the last three items together building up retained earnings.