When companies extend credit to customers for goods and services that they’ve provided, the amount the company is owed is referred to as “accounts receivable”. But what is accounts receivable in financial terms? Is accounts receivable considered an asset? If so, why is accounts receivable an asset? Find out everything you need to know about accounts receivable with our comprehensive guide.
What are assets?
First up, let’s look at the definition of assets. Essentially, a couple of different things count as assets, including:
Things of value or resources owned by the company
Prepaid expenses that haven’t expired or been used up yet
Costs with a measurable future value
Examples of assets include inventory, vehicles, cash, long-term investments, real estate and so on. Next question: is accounts receivable considered an asset?
Is accounts receivable an asset?
Yes, accounts receivable is an asset, because it’s defined as money owed to a company by a customer. Let’s take the example of a utilities company that bills its customers after providing them with electricity. The amount owed by the customer to the utilities company is recorded as an accounts receivable on the balance sheet, making it an asset.
Why is accounts receivable an asset?
So, it’s clear that accounts receivable is an asset, but why is accounts receivable an asset? It’s relatively straightforward. Put simply, accounts receivable counts as an asset because the amount owed to the company will be converted to cash later. More receivables = more cash, which leads to the growth of the business, over time.
Is accounts receivable revenue?
Whether or not accounts receivable counts as revenue is a tricky subject and tends to be determined by the method of accounting that your business uses. Under the cash basis of accounting, only transactions resulting in cash being paid in or out are revenue. As a result, accounts receivable wouldn’t be considered revenue. However, under the accrual basis of accounting, revenue is understood to be cash that comes into your business after a sale has occurred, which makes accounts receivable revenue.
Accounts receivable: asset, liability, or equity?
Accounts receivable are an asset, not a liability. In short, liabilities are something that you owe somebody else, while assets are things that you own. Equity is the difference between the two, so once again, accounts receivable is not considered to be equity. When you’re examining your company’s books, remember to always include accounts receivable as an asset, or your calculations may end up off-piste.
Is net accounts receivable a current asset?
Accounts receivable can be considered a “current asset” because it’s usually converted to cash within one year. When a receivable is converted into cash after more than one year, instead of being recorded as a current asset, it’s recorded as a long-term asset. It’s also important to remember that sometimes, due to a variety of factors, an accounts receivable isn’t ever collected. In this case, the account will be offset by the provision for doubtful debts.
Does accounts receivable count as a tangible asset?
Tangible assets are assets that have a clear value which can be easily measured. Stocks, cash, vehicles, machinery, buildings, and so on are all classified as tangible assets. Surprisingly, accounts receivable is considered to be a tangible asset. Why? When you invoice a customer, the payment terms and the amount are set, and the customer has legally committed to paying the bill. As a result, accounts receivable is a tangible asset.
Bottom line: accounts receivable are tangible, current assets that may be counted as revenue, depending on the accounting method used by your firm.
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