Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset increases, there must be a corresponding (1) decrease in another asset, or (2) increase in a specific liability, or (3) increase in stockholders’ equity.

The expanded accounting equation is:

Assets = Liabilities + Common Stock + Revenues − Expenses − Dividends Common stock is affected when the company issues new shares of stock in exchange for cash. Revenues are increases in assets resulting from income-earning activities. Expenses are the costs of assets consumed or services used in the process of earning revenue.

Dividends are payments the company makes to its stockholders.