Do Accounts Receivable Count as Revenue?

Revenue and accounts receivable are distinct yet related financial concepts. Revenue is the total income a business generates from its primary operations, such as selling goods or providing services. Accounts receivable signifies money owed to a business by its customers for goods or services already delivered but not yet paid for. Accounts receivable do not directly count as revenue; instead, they represent a future cash inflow from earned revenue.

What Revenue Represents

Revenue is the total amount of money a business earns from its primary operations before any expenses are subtracted. It is often referred to as the “top line” due to its position at the top of an income statement.

Revenue is recognized when earned, which occurs when a product or service has been delivered to a customer and the amount is measurable. For instance, if a consulting firm completes a project, revenue is earned at that point, regardless of when the client pays. Similarly, a retail store earns revenue when a customer purchases an item, even if they use a credit card and cash settlement occurs later.

What Accounts Receivable Represents

Accounts receivable (AR) refers to the money that customers owe to a business for goods or services that have been delivered or consumed but not yet paid for. This represents a legally enforceable claim for payment. Accounts receivable is categorized as a current asset on a company’s balance sheet, indicating that these amounts are expected to be collected within a short period, typically one year.

Accounts receivable arise when businesses offer credit terms to their customers. For example, if a plumbing company fixes a leaky faucet for a client and sends an invoice with “Net 30” payment terms, the amount due becomes an accounts receivable until the client remits payment. This future cash inflow is a significant component of a company’s working capital.

The Relationship Between Accounts Receivable and Revenue

Accounts receivable is not revenue itself, but it is a direct outcome of revenue that has been earned on credit. When a business provides a product or service to a customer, it earns revenue. If the customer does not pay immediately, an accounts receivable balance is created, representing the amount the customer owes for that earned revenue. This means revenue reflects the completion of a sales activity, while accounts receivable signifies the uncollected payment for that completed activity.

First, revenue is earned when goods or services are delivered or performed. If payment is not received immediately, an accounts receivable is then recorded. For example, when a software company provides its subscription service for a month, it recognizes that month’s revenue. If the customer pays monthly in arrears, an accounts receivable is generated for that month’s service until payment is received.

Accounts receivable thus represents a claim to future cash flows that originated from a revenue-generating event. This distinction allows businesses to accurately track what they have earned versus what cash they have collected. Proper management of accounts receivable is important for a company’s cash flow, as these outstanding amounts are expected to turn into cash within a relatively short timeframe.

Accrual Versus Cash Basis Accounting

The distinction between accounts receivable and revenue is important when considering accounting methods. The two primary accounting methods are accrual basis accounting and cash basis accounting. The choice of method dictates when a business recognizes revenue and expenses.

Under accrual basis accounting, revenue is recognized when earned, regardless of when cash is received. If a business delivers a service and issues an invoice, revenue is recorded at service delivery, creating an accounts receivable. Accrual accounting also matches expenses to the revenue they helped generate, providing a more comprehensive view of a company’s financial performance. Most larger businesses and public companies in the United States are required to use accrual basis accounting, as it aligns with Generally Accepted Accounting Principles (GAAP).

In contrast, cash basis accounting recognizes revenue only when cash is received, and expenses only when cash is paid. Under this method, accounts receivable are not recorded until the cash payment is collected. While simpler for very small businesses or for internal tracking, cash basis accounting may not accurately represent a company’s financial position or profitability over a specific period, as it does not account for money owed or liabilities.