Is Accounts Receivable An Asset or a Liability?

Accounts receivable is more than just a number for the books. Forming part of your balance sheet figures, accounts receivable is a critical part of your business function.

Helping you to get access to further credit and loans, make informed and critical decisions, and also providing you with insight into how the business is performing – your accounts receivable number is essential.

Recorded in your financial statements, at Direct Route Ltd, we want to look at accounts receivable further, explaining the differences between assets and liabilities and where accounts receivables sit within this.

Is account receivable an asset?

When you sell goods on credit, these transactions must be recorded as accounts receivable.

Ie, accounts receivable – money customers owe for goods/services you have provided and invoiced for, i.e., it ultimately shows how much money you have coming in.

For this reason, you should record, on your balance sheet, accounts receivable as a current asset.

Following the accounting process, when the customer then pays the invoice, the amount of accounts receivable will decrease, and your cash balance will increase.

To help breakdown the classification further:

An asset is classified as anything that brings the company financial gain.

In contrast, a liability is classified as anything that costs the company money. For example, staff salaries, business expenses, bills, etc.

Note: account receivable cannot be classified as revenue as no money has been received yet. Businesses are required to turn their accounts receivable total into revenue in order to keep the business moving.

Is accounts payable an asset or liability?

As a business, when you raise an invoice, it will then form part of your accounts receivable, becoming a cash balance in your accounting only when the invoice has been paid.

This makes accounts receivable a current asset that will produce a cash outcome within a reasonable timeframe; i.e., by issuing an invoice, your business will benefit financially.

However, we must note that accounts receivable should not be itemised as an entry within cash accounting because payment has not yet been received; it is pending. However, since you have already provided the goods and services on a credit system, it must still be recorded to maintain a clear paper trail, and your customer will be issued an invoice.

If an account receivable is longer than 12 months, it must then be converted to a long-term fixed asset.

Benefits of account receivable

Helps to remove uncertainty in cash flow predictions
Helps to improve the customer experience – from invoicing right through to collections
Account receivable can, in some instances, help to reduce collection costs
AR can be automated to save you time and money
AR helps to provide accurate financial records
Can measure the efficiency of a business’s operations
Businesses can borrow against their AR when more liquidity is required

Challenges surrounding accounts receivable

You haven’t received any payment yet
Does include risk, as offering credit does come with a high degree of uncertainty
Could see reduced payments, which can negatively impact operations

Late payment of commercial debts

Due to the complexities surrounding accounts receivable and understanding whether `is AR an asset or a liability,` businesses need a good credit control team to manage and record everything accurately.

However, as we know, not all invoices are paid on time, and in these instances, your balance sheet can become more challenging, and your cash flow negatively impacted.

Usually, customers will be provided with a 30-90 day due date to settle their invoice. If the customer does not pay the amount owed, this amount is then deducted from AR and added to bad debt expenses.

In some cases, businesses will record a percentage of their accounts receivable as bad debt expenses to protect cash flow forecasting.

For example, a high AR can indicate that a company is not collecting payments on time and overdue invoices are piling up. In these instances, AR can become a liability if money is not received.

If you find yourself in a situation where you require commercial debt recovery to help support your cash flow and manage accounts receivable, please always work with professional collection teams who have experience and knowledge in the area.

To learn more, check out our post on the differences between commercial and consumer debt collections.

It’s also important to ensure that you issue invoices promptly and include all the correct information, such as the due date so you know when to expect payments, clear payment terms that have been communicated in advance, early payment discounts where applicable, payment plans, various ways to pay, etc.

Is account receivable a liability?

In a word, no.

Account receivable is the money you are expected to receive from the sale of goods and services on credit; therefore, it should be recorded as a current asset.

Credit is then converted to cash once the invoice has been paid.

As specialists in commercial debt recovery, we can help you with the late payment of commercial debts, converting your accounts receivable into cash flow to keep your business operations going.