Q11: What is the extended fundamental accounting equation?
The relationship of the five elements of accounting can be viewed as:
Assets = Equity + (Revenue – Expenses) + Liabilities
Assets + Expenses = Equity + Revenue + Liabilities
This is often called the extended fundamental accounting equation, because it includes revenue and expenses, or in other words, includes changes in value over a period (namely, revenue and expenses) as well as simply measures of value at a point in time (assets, equity and liabilities). Understanding the extended fundamental accounting equation is essential to understanding what accounting is about. It is also a necessary first step in our journey to being able to see aspects of the world of business as accounting experts see them and in the process to become, over many years, an accounting expert ourselves.