# Accounting Equation: Basic Elements Discussed and Explained

Discuss the expansion of the basic accounting equation to include revenues and expenses. Discuss and illustrate how this expanded accounting equation stays in balance after every transaction. Do the rigorous rules of accounting necessarily mean there is only one numerical answer? Explain.

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#### Solution Preview

The basic accounting equation states that Assets = Liabilities + Owner's Equity. The expansion of this equation can be stated as follows: Assets = Liabilities + Owner's Equity + Revenue - Expenses. The reasoning behind this expanded version is that Revenue increases Owner's Equity and Expenses decrease Owner's Equity. It is important to understand also that Revenue and Expense accounts are temporary accounts that are later closed out at the end of the period. The result Revenue - Expenses = net income and the net income increases Owner's Equity. An example to illustrate how this expanded accounting equation stays in balance after every transaction can be shown as follows:

Transactions:

Received cash from owner as an investment in ...

#### Solution Summary

This solution is comprised of a discussion about the basic accounting equation to include revenue and expenses and to illustrate how this expanded accounting equation stays in balance after every transaction. It also answers the question "do the rigorous rules of accounting necessarily mean there is only one numerical answer?"

The details of this topic provide students with a clear understanding of the accounting equation.

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