Is Accounts Receivable a Revenue or Expense?

Understanding a business’s financial health requires familiarity with fundamental accounting terms. Accounts receivable, revenue, and expenses are distinct aspects of a company’s financial activities and position, crucial for interpreting financial statements.

Understanding Accounts Receivable

Accounts receivable (AR) represents money owed to a company for goods or services delivered but not yet paid for. It is recorded as a current asset on a company’s balance sheet, signifying a claim to receive payment in the near future.

Accounts receivable commonly arise when businesses sell products or services on credit. For example, a consulting firm might invoice a client after completing a project, or a wholesaler might deliver goods with payment due in 30 days. The amount owed before payment becomes an account receivable.

Understanding Revenue

Revenue is the total income a business generates from its primary operations, such as selling goods or providing services. Often called the “top line,” it appears at the top of a company’s income statement. Revenue is recognized when earned, regardless of when cash is received.

This aligns with accrual basis accounting, where transactions are recorded when they occur, not when cash changes hands. For instance, a software company earns revenue when it provides service to a customer, even if the customer pays later. Revenue sources include sales of merchandise, service fees, or subscriptions.

Understanding Expenses

Expenses are the costs a business incurs to generate revenue. These costs represent the outflow of economic benefits, consumed in the process of earning income. Expenses reduce a company’s profit and are reported on the income statement.

Common examples of business expenses include rent, salaries, utility bills, and the cost of goods sold. Under accrual accounting, an expense is recorded when incurred, such as when services are received, even if payment is made later.

The Relationship Between Accounts Receivable, Revenue, and Expenses

Accounts receivable is an asset and is not revenue. While it arises from a revenue-generating event, it represents the right to receive future cash, not the revenue itself. Revenue is recognized when goods or services are delivered, establishing the earning process, which may then lead to accounts receivable if payment is not immediate.

Accounts receivable is also distinctly different from an expense. Expenses are costs incurred by a business, whereas accounts receivable signifies a future cash inflow. When a company makes a sale on credit, revenue is recognized, and an accounts receivable is simultaneously recorded as an asset on the balance sheet.

When the customer subsequently pays, the accounts receivable balance decreases, and the company’s cash balance increases. This collection of cash is merely a conversion of one asset (accounts receivable) into another asset (cash); it does not create new revenue. Therefore, revenue reflects what a business has earned, expenses represent the costs to earn it, and accounts receivable indicates what customers owe for those earned amounts.