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Is Accounts Receivable an Asset or Liability?

14 April, 2022
5 min read
Rachelle Fisher, AVP, Digital Transformation
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What you'll learn

  • How are assets different from liabilities?
  • What is Accounts Receivable and is it an asset or liability?
  • How can AR be beneficial for a business?
CONTENT
Introduction
What’s the key difference between assets and liabilities?
What is accounts receivable?
How can businesses benefit from accounts receivable?
To sum it up
FAQs
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Introduction

Accounts Receivable (AR) is the amount of money that a company is yet to receive from its customers in return for the goods sold or services delivered. Since most B2B businesses operate on credit, a sale is recorded under Accounts Receivable until a customer clears the payment and it’s converted to cash.

Generally, businesses offer a 30-90 day period to their clients to make a payment. If they fail to clear their dues, AR is deducted and added to bad debt. So, there is a probability that a company’s AR might not translate to revenue and profits.

Is Account Receivable an Asset or Liability

Then the question is whether accounts receivable is an asset or liability. In this blog, we will discuss the same.

What’s the key difference between assets and liabilities?

Assets Liabilities
An asset is a resource owned by an individual or an organization with the implicit understanding that it will reap economic benefits in the future. Liabilities are something that an individual or an organization owes to someone else. They are paid off over time monetarily or in the form of services.
For a company, an asset isn’t just about cash but also includes factors that will help reduce costs, boost sales, and improve productivity. For example, loans, accounts payable, salaries of employees, etc.

What is accounts receivable?

Account receivable is an integral part of the balance sheet and is essential that a business manages it efficiently. However, a business wouldn’t want to have it in excess. A high accounts receivable balance indicates that a business is finding it difficult or is unable to collect payments on time. Not collecting accounts receivables leads to bad debt, and the business will suffer from low credit scores, poor cash flow, and high days sales outstanding (DSO). In such extreme cases, a high AR can also become a liability.

Businesses deal with such situations by offsetting bad debt with an allowance for doubtful accounts. For smaller transactions, a company might opt for direct write-offs as a loss or expense.

However, in most cases, accounts receivable become of significant monetary value when the business receives the majority of due payments from clients. Hence, it falls under the current assets category as AR; it is not held for very long on the balance sheet and is usually converted to cash in less than a year. But in cases where the AR on a balance sheet is stagnant for more than 12 months, it gets converted to long-term fixed assets.

How can businesses benefit from accounts receivable?

Accounts receivable can be beneficial to a company in a variety of ways. Even though not all AR converts to cash, the bad debt is accounted for through an allowance. Let’s look at a few ways a company’s receivables helps them even before it’s converted to cash.

1. Helps in raising money by discounting AR invoices

Let’s say Company A receives an order to produce 1 million glass bottles from Company B at $2 per bottle. This brings the order size to $2 million. However, to fulfill the order, the company needs a capital of $1 million which it doesn’t have.

In such a case, the company can list its accounts receivable contract for sale at a 10% discount. Many websites let you do that where buyers and sellers can connect and trade discounted invoices. The buyer of the contract pays the company $1.8 million in advance to fulfill the order, and whenever Company A makes the payment, the buyer receives it, thus making a $200,000 profit.

2. Assists in easy loan approvals

A high accounts receivable and low bad debt shows that a company is doing well as they have healthy sales volumes and converting it to cash. This improves the business’s credit score and makes it easier for them to get low-interest loans for future endeavors.

To sum it up

Manual accounts receivables processes result in poor cash flow, high DSO, and an extended order-to-cash cycle. Therefore, it is essential to automate accounts receivable processes and make a company’s invoicing, credit, and collection methods more efficient.

A PYMNTS.com report suggests that 87% of firms that have automated AR functions are processing faster. By doing the same, your businesses will be able to allocate more time to high-value tasks while ensuring that the AR doesn’t pile up and become bad debt.

Want to automate your Accounts Receivable and move towards success? Check out the intelligent route to AR success.

FAQs

1) What are the different types of assets?

There are 4 primary types of assets:

  1. Current Asset: Short-term assets that get converted to cash within a small amount of time fall under this category. Inventory, accounts receivables, and cash equivalents are examples of current assets.
  2. Fixed Assets: Long-term resources are termed fixed assets. Their value and the ability to create economic benefits reduce with aging and depreciation over time. For example, equipment or manufacturing plants.
  3. Financial Assets: Investments such as stocks, bonds, and equities fall under financial assets. They are categorized based on the intent of investment.
  4. Intangible Assets: These assets do not have any physical presence but are critical for a company. For example, trademarks and copyrights. 

2) What are the different types of liabilities?

There are 2 types of Liabilities:

  1. Current Liabilities: For a company, liabilities that are due within a year fall under current liabilities. These include salary for employees, accounts payable, and dividends payable.
  2. Non-current Liabilities: These liabilities are long-term and are expected to be paid in a year or more. It is generally higher than current liabilities and forms an essential part of an organization’s operations. For example, loans, bonds, warranty liability, and so on.

3) Is accounts receivable a tangible asset?

Tangible assets are physical assets with a proper cash value, making them easy to identify. Since accounts receivable is converted to cash when a customer makes a payment, it can be termed a tangible asset.

4) What are accounts receivable on a balance sheet? 

Accounts receivable are listed under the current assets sections in a balance sheet. These are assets that clients owe to a company and are converted into cash in less than a year.

5) Why is accounts receivable a current asset?

Accounts receivable are often converted into cash in less than a year, which makes them fall under the current asset category. In case an AR is not converted to bad debt and is held for more than a year, it will become a fixed asset.

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