learn › Bookkeeping

Sorting Transactions

lesson · about 3 minutes

Is it revenue, an expense, an asset, a loan, or the owner's money?

In your head, jot if needed · no calculator why?

Opens at level 7. You're level 1. You can read and practice here now.

the idea

Bookkeeping starts with sorting. Every dollar in or out gets a label, and the label says what the money is, not which way it moved.

An expense is something used up in running the business this month, like rent, ink or a bank fee. Revenue is money earned by delivering goods or work. An asset purchase buys something that lasts for years, like a laptop or a van. A loan must be repaid, so it is a liability. An owner's draw is money the owner takes for personal use, and an owner's contribution is money the owner puts in. Neither is revenue, an expense or a wage.

techniques

Label it by what it is

One transaction to classify.

Used up in running the business this month? Expense.
Earned by delivering goods or work? Revenue.
Lasts for years? Asset purchase.
Borrowed? Loan. The owner's own money, in or out? Contribution or draw.

worked example

Example: A design studio pays $1,200 of office rent. The owner also takes $800 from the business account to pay personal rent. How much of the $2,000 is a business expense?

Office rent is used up running the business: expense.
The owner's personal rent is a draw, not an expense.
Expense: $1,200.

Answer: $1,200

Cross out, then add

A list of payments or receipts, and you want only the expenses or only the revenue.

Go down the list one line at a time.
Cross out loans, owner money, loan principal and asset purchases.
Payments: cross out bills expensed last month. Receipts: cross out invoices counted last month, deposits for future work, supplier refunds.
Add what is left.

worked example

Example: This month a bakery paid $1,400 of rent, $500 of loan principal, $2,500 for an oven recorded as an asset, and $300 for flour used this month. How much of this is expense this month?

Cross out the principal and the oven.
Rent and flour: $1,400 + $300 = $1,700.

Answer: $1,700

watch out for

Labeling by the direction the cash moved. An owner's draw sends cash out, but it is not a wage or an expense.
Counting every payment as an expense, including loan principal and a laptop recorded as an asset.
Counting all incoming cash as revenue, including loans, owner money and payments on last month's invoices.

practice

Pick the category

worked example

The owner deposits $3,900 of their own money into the business account as an investment. How should the bookkeeper classify it?

Owner's draw
Loan (liability)
Owner's contribution
Revenue

Answer: Owner's contribution

The owner's own money put into the business is a contribution to equity, not revenue or a loan.

Which payments are expenses?

worked example

This month the business paid: $515 for this month's utilities, a $1,185 owner's draw, and a $2,695 laptop recorded as an asset. How much of this is expense this month?

Answer: $515.00

Only one item is used up this month, so expense is $515.
Not expenses: the owner's draw reduces equity and the laptop is an asset.

Which receipts are revenue?

worked example

This month the business received: a $3,350 deposit for work you'll do next month, $5,600 from the owner, $400 of card payments for services delivered this month, and $850 from a customer paying last month's invoice. How much of this is revenue earned this month?

Answer: $400.00

Only one item was earned this month, so revenue is $400.
Not revenue: a deposit is work you still owe, owner money isn't earned, and last month's invoice was counted as revenue last month.