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 is an asset account that represents money that is owed to a business by its customers for goods or services that have been delivered or sold, but have not yet been paid for. It is recorded as a current asset on the balance sheet, as it is expected to be collected within one year or less.
For example, if a company sells goods or services to a customer on credit, the customer is responsible for paying the company at a later date. The company will record this transaction as an accounts receivable, as it is a claim against the customer for payment. When the customer eventually pays the company, the accounts receivable will be reduced, and the company will record the payment as a reduction in the accounts receivable balance.
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:
Accounts receivable is a type of current asset. Current assets are assets that are expected to be converted into cash or used up within one year or less. Examples of current assets include cash, marketable securities, accounts receivable, and inventory.
On a company's balance sheet, current assets are typically listed in order of liquidity, with the most liquid assets listed first. This means that cash is typically listed first, followed by marketable securities, and then accounts receivable. This ordering reflects the ease with which these assets can be converted into cash. For example, cash is the most liquid asset, as it can be immediately used to pay bills or make purchases, while accounts receivable may take longer to collect.
Other types of assets include fixed assets, such as buildings and machinery, and intangible assets, such as patents and trademarks. These assets are not expected to be converted into cash or used up within one year, and are therefore not classified as current assets.
In double-entry bookkeeping, an increase in an asset account is recorded as a debit, and a decrease in an asset account is recorded as a credit. Therefore, the accounts receivable account is debited when the company records a sale on credit.
For example, if a company sells goods or services to a customer on credit for $100, it will record the transaction by debiting the accounts receivable account for $100, and crediting the sales revenue account for $100. This increases the accounts receivable balance by $100, and records the sales revenue earned by the company.
When the customer eventually pays the company, the accounts receivable account will be credited for the amount of the payment, and the cash account will be debited for the same amount. This reduces the accounts receivable balance by the amount of the payment, and increases the cash balance by the same amount.
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.
Accounts payable is a type of liability. Liabilities are obligations that a business owes to its creditors, such as bills for goods or services that have been received but not yet paid for.
Accounts payable specifically represents the amount of money that a business owes to its suppliers for goods or services that have been received, but have not yet been paid for. It is recorded as a current liability on the balance sheet, as it is expected to be paid within one year or less.
For example, if a company purchases goods on credit from a supplier, it is responsible for paying the supplier at a later date. The company will record this transaction as an accounts payable, as it is an obligation to pay the supplier. When the company eventually pays the supplier, the accounts payable will be reduced, and the company will record the payment as a reduction in the accounts payable balance.
Understanding all your assets and liabilities, like accounts receivable and amounts payable, means understanding your finances.
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