Approach: Look for the key word or words, if any, in each individual item. For examples, a list of key words or phrases follows along with the likely classifications:
|Key word (phrases)||Classification|
|Revenue||Revenue on the income statement|
|Expense||Expense on the income statement|
|Earned||Revenue on the income statement|
|Incurred||Expense on the income statement|
|On hand||Asset on the balance sheet|
|Prepaid||Asset on the balance sheet|
|Receivable||Asset on the balance sheet|
|Payable||Liability on the balance sheet|
aThe word income in an item is often used instead of the word revenue. Such as rent income, interest income, and commission income. This usage of the word income should not be confused with the term “net income” which is the excess of total revenues over total expenses.
TIP: Keep in mind that an asset is an item that offers probable future economic benefits. If something will assist the revenue generating process of a future accounting period, it is an asset.
TIP: You can determine the position of an entity in a particular transaction by the wording of the explanation. For example, we would use the item “bank loan payable” (a liability) if we had borrowed money from the bank. The bank would have a “loan receivable” (an asset) item on its balance sheet. As another example, we would have “legal fees incurred” (an expense) on our income ...