July 8, 2022
Are accounts receivable asset or liability? Accounts receivable is money that your company is owed by a customer. For example, homeowners pay for electricity after the electric company supplies their home with power. Any time your company sells something on credit or a payment plan, that’s an example of accounts receivable. But that’s not the same as money your company actually has right now.
So are accounts receivable an asset or a liability? Do they count as part of your company’s financial health, or will they tempt you into thinking you have more resources than you actually do?
Accounts receivable are not liabilities. That’s because they are contractually owed to your company. They are listed on your company balance sheet, and can be used to borrow money from a bank. So, yes, accounts receivable are an asset.
However, they can be a risky bet. It’s always possible that whoever owes your company money won’t pay. But accounts receivable do not decrease your company’s equity. Other, less risky assets include things like:
These examples, as well as accounts receivable, are categorized as current assets.
If accounts receivable are an asset, what about accounts payable?
Accounts payable is the opposite of accounts receivable. Account payable is money your company owes. Some examples of accounts payable may be companies that supply your company with needed materials. Or, accounts payable may be your company’s creditors.
Accounts payable qualify as a current liability. They are money owed to another company or service, and they are listed under liabilities on the company balance sheet.
It is good practice to pay off accounts payable as soon as possible in order to limit liabilities and improve current assets.
In order to find accounts receivable on a balance sheet, look under current assets. Remember, accounts receivable are an asset because you can reasonably plan that you’ll receive that payment and have that cash. But, if it will take longer than a year for that cash to come in, that specific account will be under long term assets on your balance sheet.
does accounts receivable go on the income statement? The answer is no. Not until you see that money and it becomes revenue.
But what if those payments never come in? There is always a chance that customers will default on a payment. Therefore, it’s important to take that risk into account when determining how to consider your accounts receivable as an asset to your company.
In order to consider that risk, use an allowance for doubtful accounts. This is a calculation that figures in the risk of never seeing the money you are owed as listed in your accounts receivable on your balance sheet.
Understanding all your assets and liabilities, like accounts receivable and amounts payable, means understanding your finances.
LiveFlow makes it easy to customize templates and import your Quickbooks data into Google Sheets for analysis. You can cater LiveFlow to your individual needs, and get better information on your company’s financial health.