Which one of the following represents the expanded basic accounting equation? *
A. Assets Liabilities + Owner’s Capital + Owner’s Drawings – Revenue – Expenses.
B. Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenues.
C. Assets Liabilities Owner’s Drawings = Owner’s Capital + Revenues – Expenses.
D. Assets = Revenues + Expenses – Liabilities.
The Correct Answer and Explanation is :
The correct answer is B: Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenues.
Explanation:
The basic accounting equation serves as the foundation of the double-entry accounting system. It states that:
Assets = Liabilities + Owner’s Equity
The expanded version of the accounting equation includes the elements that make up the Owner’s Equity, specifically Revenues, Expenses, and Owner’s Drawings. This expanded equation allows for a more detailed view of how each component of a business’s financial position interacts with one another.
The expanded basic accounting equation is as follows:
Assets + Owner’s Drawings + Expenses = Liabilities + Owner’s Capital + Revenues
- Assets: These are the resources owned by the business, such as cash, inventory, and property.
- Liabilities: These represent the debts or obligations the business owes to others, such as loans, accounts payable, or mortgages.
- Owner’s Capital: This refers to the initial investment and any additional investments made by the business owner(s). It represents the owner’s stake in the business.
- Owner’s Drawings: This refers to any withdrawals made by the owner from the business for personal use. It reduces the overall equity of the business.
- Revenues: This represents the income generated from the business’s core activities, such as sales of goods or services.
- Expenses: These are the costs incurred to generate revenues, such as wages, rent, utilities, and other operational expenses. Expenses reduce the net income and, ultimately, the owner’s capital.
In equation B, each component is correctly placed to reflect the relationships between assets, liabilities, owner’s capital, revenues, expenses, and drawings. This format helps in tracking the financial performance and position of the business, ensuring that the accounting equation remains balanced and accurate.
Each of the other options (A, C, D) incorrectly places or omits necessary components, such as combining unrelated elements or failing to reflect the correct relationship between them. Therefore, option B is the correct expanded form.