Definition
An account receivable is considered an asset for a company. It represents money that is owed to the company for goods or services provided to customers on credit. Therefore, it falls under current assets on the balance sheet because it’s expected to be collected within a short period, usually one year.
Key Takeaways
- Account Receivable is an asset for any business or organisation. It represents the amount of money owed by the customers to the company for goods or services that have been delivered or used but not yet paid for.
- Account Receivable is considered a current asset as it is usually due within one calendar year. It plays a significant role in a company’s cash flow as it represents invoices that a company is expecting to receive a payment for.
- Unlike liabilities which indicate debts that a company is required to pay off, account receivable does the opposite. It indicates the revenues that the company is set to earn, thus helping improve the overall financial health of the business.
Importance
Understanding whether accounts receivable is an asset or liability is crucial in the realm of finance because it directly impacts a company’s balance sheet and fiscal health.
Accounts receivable is generally considered an asset because it represents money that is owed to the company for goods or services that have already been delivered or provided.
Assets add value to the company and can be converted into cash, which can be used to pay off liabilities, reinvest in the business, or return to shareholders.
Therefore, correctly categorizing and managing accounts receivable is important because it affects liquidity, cash flow, revenue, and profitability of the firm.
Explanation
Account Receivable is an asset to a company, not a liability. It denotes the amount of money owed to a business by its customers for goods or services that have been delivered or used but not yet paid for. These are considered as an asset because they represent a future expected cash flow to the company.
When a business sells goods or services on credit, it creates a receivable that denotes its right to collect payment from the customers at a later date. In essence, it’s like an IOU issued by a customer to the company. Accounts receivable is vital for managing a company’s cash flow.
It’s used to track all unpaid invoices by the company’s clients. This account is crucial because it keeps track of the revenue that has not yet turned into cash. It helps the firm manage and forecast its future cash earnings.
Moreover, managing this asset well can greatly improve a company’s financial health as it can provide cash to meet expenses or invest back into business operations promptly.
Examples of Is Account Receivable – An Asset or Liability?
Account Receivable is considered an asset in financial accounting because it represents a legal obligation for the customer to pay for the goods or services delivered by a company. Here are three real-world scenarios:
Consulting businesses: A consulting firm provides services to a client. The client doesn’t pay immediately after the service has been delivered, instead they receive an invoice that requires payment within a certain period of time (often 30-60 days). Until the client pays that invoice, it remains as “Accounts Receivable” on the firm’s balance sheet. It’s an asset because it’s money the firm is legally entitled to and expects to receive.
Retail stores: Let’s say a furniture store sells a couch to a customer on credit. The customer takes the couch home but agrees to pay the bill over a period of six months. This “promise to pay” is recorded as Accounts Receivable in the furniture store’s books and is considered an asset.
Manufacturing companies: A manufacturing company produces and delivers goods to retailers or wholesalers. These customers often do not pay immediately upon receiving the goods, but agree to pay later (usually within 30-90 days), creating an Account Receivable for the manufacturer. This is an asset because it represents money the company will receive in the future for goods already delivered.
FAQ Section
Is Account Receivable – An Asset or Liability?
Account Receivable is considered an asset. This is because an account receivable is the amount of money owed by the customers to the business for the goods or services bought on credit. These denote future revenues that are expected to be earned within a short span of time.
Related Entrepreneurship Terms
- Current Assets
- Balance Sheet
- Debt Collection
- Financial Statements
- Accounts Payable
Sources for More Information
- Investopedia: A leading finance and investment educational website, where users can learn more details about Accounts Receivable and whether they are considered assets or liabilities.
- Accounting Coach: A website with comprehensive resources on accounting concepts, including a detailed perspective on the nature of Accounts Receivable.
- Corporate Finance Institute (CFI): This site offers a rich variety of guides and articles that delve into numerous finance, accounting, and corporate topics, including Accounts Receivable.
- My Accounting Course: A website that specializes in providing free accounting courses, which also cover key topics like Accounts Receivable.
