Updated July 14, 2023
Definition of Is Accounts Receivable an Asset
Accounts Receivable is the amount that is yet to be received from customers for the goods or services that the company has provided to them. Since this amount will be converted into cash in less than one year, it is considered a current asset.
Is Accounts Receivable an Asset
Let’s say you are opening a small business and you are reluctant to offer credit to customers, but there is a pro in offering the credit. That credit will be considered as accounts receivable, which will be converted into cash in the future; hence it is an asset that increases the value of your business.
When a company provides some goods or services to the customers, then for the goods/services, the company issues an invoice to the customers. This amount is recorded as revenue in the income statement in accrual accounting, and if the amount is yet to be owed to the seller, it is recorded as an asset in the balance sheet. This is considered an asset because the company will convert it into cash in the near future. Typically, the company collects the amount within a year. Hence it is a current asset. However, if, in some circumstances, the payment happens after 1 year, then it can be classified as a fixed asset.
Why are Accounts Receivable an Asset
An asset is an item or amount owed to the company that can be converted into cash. For example, accounts receivable are generated when the company provides some goods/services to the customers, and the amount that pertains to those goods/services is still owed to the company. Since the company expects to receive this amount within a year, i.e., these accounts receivable will be converted into cash in the future; hence accounts receivable is classified as an asset. If the customer defaults on the payment for some reason, then this amount is offset by the allowance for doubtful accounts.
Do Accounts Receivable Count as Tangible Assets
Tangible assets are usually the assets that are physically present, such as buildings, properties, laptops, etc. But stocks and cash are also classified as tangible assets, meaning account receivables are counted as tangible assets since they have a cash value that will be generated in the future.
Accounts receivables have cash values because of the transaction between the customer and supplier. After delivering the goods/services, the supplier sends an invoice to the customer. This amount can be recorded as revenue in accrual accounting, and subsequent value will be classified as accounts receivable. These accounts receivable will be converted into cash when the cash is received from customers. Also, note that intangible assets are significantly different from tangible assets and can not be measured physically, such as patents, trademarks, customer relationships, etc.
Is Net Accounts Receivable Current Asset
Net Account receivable is the amount owed to the company after subtracting the amount that will likely never be received from the customer. This likely amount that will not be received from the customer is put into a contra-asset account called “allowance for doubtful debts”. This amount is subtracted from gross accounts receivable to determine the net accounts receivable.
Since these net accounts receivables will be converted into cash in less than one year, this can be considered a current asset.
Conclusion
Accounts receivable is one of the important concepts in the company’s books. By analyzing the accounts receivable, a user can estimate the company’s credit policy. Though it is good to have accounts receivable in the books, more receivables may indicate that the company is having difficulty collecting money from customers or has a very lenient credit policy that needs to be considered. Since it is an asset, a company should not shy away from giving credit to customers but be sure that it is collecting these receivables efficiently.
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