Is Accounts Receivable an Asset Account?

Accounts receivable is an asset account. It represents money that customers owe a business for goods or services already provided but not yet paid for. An asset is something of value that a business owns and expects to provide a future economic benefit. This article will explore the accounting definition of an asset, explain what accounts receivable entails, and how it appears on a company’s financial statements.

What an Asset Is

An asset is a resource controlled by an entity from which future economic benefits are expected to flow. To be an asset, it must have measurable value and the company must have control over it. This control allows the business to convert the asset into cash or use it to generate revenue.

Assets include physical items like cash, inventory, property, and equipment, and non-physical items such as patents or trademarks. Assets are classified into current and non-current types. Current assets are those expected to be converted into cash, sold, or consumed within one year. Non-current assets are long-term resources that will not be converted to cash within one year, such as machinery or buildings used for extended periods.

Defining Accounts Receivable

Accounts receivable (AR) refers to money owed to a business by its customers for goods or services delivered but not yet paid for. This arises when a business sells on credit, meaning it provides goods or services immediately but allows the customer to pay at a later date. When a company issues an invoice to a customer, that amount becomes an account receivable until payment is received.

Accounts receivable is classified as a current asset because collection is expected within a short period, usually less than one year. Examples include a company billing clients for services after completion or a supplier delivering products before receiving payment. Businesses establish credit terms with their customers, such as “Net 30” or “Net 60,” specifying the payment period.

Accounts Receivable on Financial Statements

Accounts receivable is displayed on a company’s Balance Sheet, within the Current Assets section. The Balance Sheet provides a snapshot of a company’s financial position, detailing its assets, liabilities, and owner’s equity. By including accounts receivable, the Balance Sheet reflects money the company is owed and expects to collect, contributing to its total assets.

Managing accounts receivable is important for a company’s liquidity and cash flow. While accounts receivable represents an asset, it only becomes cash once collected. Businesses must monitor these amounts to ensure timely payments and maintain sufficient funds for operations. Not all accounts receivable may be collected; therefore, an allowance for doubtful accounts is established. This allowance is a contra-asset account that reduces the gross accounts receivable to reflect the estimated uncollectible amount, providing a more realistic view of receivables.