Is Accounts Receivable an Asset? | F&A Glossary (2024)

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What are Accounts Receivable Assets?

Accounts receivable are considered an asset in the business’s accounting ledger because they can be converted to cash in the near term.

Most businesses have accounts receivable. These are sales for which payment has not yet been received. The customer has not paid for the good or service received at the time of the transaction. I

Instead, the business has extended credit to the customer and expects to receive payment for the transaction at some point in the future.

Accounts receivable represent convertible assets owed to the company. That is, they describe a financial resource that can be converted to cash in the near future, once the customer has paid. An asset is any resource that provides monetary value to a business. It can help the business produce economic value and can be converted to cash.

Assets are usually classified into one of two categories—current and non-current. Current assets refer to those that are liquid, meaning they can be easily converted to cash in less than a year.

Accounts receivable are typically collected in two months or less. For this reason, they are considered a current asset or a “short-term asset.”

When are Accounts Receivable Assets Used?

Accounts receivable assets will be recorded in the balance sheet for the business along with other assets.

The balance sheet is a document that summarizes the business’s overall financial status. It is a static document that provides this information at a specific point in time.

By providing detailed information at a fixed point in time, the balance sheet can be said to provide a “snapshot” of the business and its key financial indicators.

Information in the balance sheet represents the three fundamental accounting measures: assets, liabilities, and equity. Accounts receivable will be recorded in the balance sheet along with other short-term or current assets, such as cash, cash equivalents, stock inventory, marketable securities, and prepaid expenses.

Typically, assets are listed first on the balance sheet, followed by liabilities and equity. Sometimes assets are listed in the left column, and liabilities and equity are listed on the right. In either case, the balance sheet is organized around the fundamental accounting equation, which is represented as: Assets = Liabilities + Equity. All data in the balance sheet is arranged according to these three categories.

FAQ

How are Accounts Receivable Assets Calculated?

Accounts receivable record purchases and transactions that have not yet been paid for by the customer. In a perfect world, all accounts receivable will be collected in the standard timeframe of one year or less.

In reality, this does not happen. Some accounts receivable will never be collected—this is considered bad debt.

Bad debt offsets accounts receivable assets by subtracting the value of the asset in the income statement. Because businesses do not know if or when an accounts receivable will become a bad debt, they estimate instead.

The business can estimate bad debt in one of two ways.

Direct write-off method—with this method, accounts are written off as a loss once they are determined to be uncollectible. Because this method does not adhere to the matching principal, it is the less acceptable accounting method.

Allowance method—this method allows the business to remain consistent with the matching principal. According to this method, the business will set aside a reserve for expected bad debts, also called doubtful accounts. This reserve, or allowance, is referred to as a contra asset account because it “nets” or balances against the accounts receivable assets listed in the balance sheet.

The allowance is calculated based on an estimate of how many accounts receivable might not be collectible. The estimate is calculated as a percentage of sales multiplied by a historical average of accounts receivable that have gone uncollected.

Although it is based on an estimate, this method allows a business to align bad debt to the reporting period in which the sale occurs. This is in accordance with the matching principal, and therefore, it is considered a more accurate form of accounting bad debt expenses.

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Is Accounts Receivable an Asset? | F&A Glossary (2024)

FAQs

Is accounts receivable considered an asset? ›

Accounts receivable is listed on the balance sheet as a current asset. Any amount of money owed by customers for purchases made on credit is AR.

What is the glossary of accounts receivable? ›

Accounts receivable is an accounting term that refers to sales for which payment has not yet been received. The customer has not paid for the good or service received at the time of the transaction.

Why is AR 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.

What asset class is accounts receivable? ›

Class III: Accounts Receivables

These assets are not normally included in the purchase. The seller normally retains ownership of the accounts receivable as of the closing date, and the buyer receives the outstanding payments and remits them to the seller post-closing.

Is accounts receivable an asset quizlet? ›

Accounts receivable is the amount owed to a seller by a customer. As such, it is an asset, since it is convertible to cash on a future date.

Why isn't accounts receivable a liability? ›

Accounts receivable count as an asset because the amount owed to the company should be converted to cash later. The money can then be used to pay expenses or purchase more inventory. It can also be reinvested back into the business.

What is a fancy name for accounts receivable? ›

On this page you'll find 6 synonyms, antonyms, and words related to account receivable, such as: arrears, balance due, debt, bill, invoice, and receivable.

What type of account is accounts receivable? ›

What type of account is accounts receivable? Accounts receivables, listed as a current asset, signify money owed by customers for provided goods or services. Displayed on the balance sheet under current assets, it affects a company's liquidity and working capital.

What is another name for accounts receivable in accounting? ›

Some business owners might simply call them debts, receivables for short, or a line of credit.

Why are accounts receivable not an asset? ›

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.

What are the GAAP rules for accounts receivable? ›

According to US GAAP, the company's accounts receivable balance must be stated at “net realizable value”. In basic terms, this just means that the accounts receivable balance presented in the company's financial statements must be equal to the amount of cash they expect to collect from customers.

How to record accounts receivable? ›

When you send an invoice to a customer, you enter it as a journal entry to the accounting journal. For the journal entry, you can document the total amount due from the invoice as a debit in the accounts receivable account. You also list the total amount due from the invoice as a credit in the sales account.

What are the 4 types of assets? ›

Assets can be broadly categorized into current (or short-term) assets, fixed assets, financial investments, and intangible assets.

Is a bill receivable an asset or liability? ›

Bills receivable are assets to the company. Bills payable are liabilities to the company.

Does accounts receivable go on a balance sheet? ›

An account receivable is an asset recorded on the balance sheet as a result of an unpaid sales transaction, explains BDC Advisory Services Senior Business Advisor Nicolas Fontaine.

What are the three classifications of receivables? ›

Receivables can be classified into accounts/trade receivable, notes receivable, and other receivables.

What is the difference between accounts receivable and payable? ›

Accounts payable vs. accounts receivable are opposites, where accounts payable is money a business owes its suppliers and accounts receivable is money owed to the business (typically by customers).

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