Is Account Receivable a Current Asset?
Assets mean anything that has value for the business. Receivables results in a future inflow of cash, therefore, it is considered as an asset. Now the question arises what can we classify account receivable as a current asset. The answer is yes. Since the outstanding debtor’s balance is expected to be realized in one operating cycle, it can be easily converted in cash within a span of less than one year. However, if the credit terms of a company exceed one year, that portion of receivable is not classified as a current asset.
Examples of Accounts Receivables as Current Assets
Example #1
Garaner’s Company sells $1,200 of gems jewelry to a retailer on credit. The retailer has 60 days to pay the full $1200. Garaner’s Company will decrease its inventory by $1,200 and increases its accounts receivable by $1,200. After 60 days, once the retailer has paid the £1200, the Company increases its cash balance by $1,200 and decreases its accounts receivable by $1,200. The receivable here is a current asset as realization is made in less than 1 year.
Example #2
Abc limited sold 100 boxes of cartilage to Mr. Smith and gives 60 days credit terms. As and when the seller transfers goods to Mr. Smith, he will record sales and book receivable amounts against Mr. Smith. This outstanding amount is an asset, as it will appear in the balance sheet as receivable. Further, since the amount is to be received in less than 1 year, it will be classified as a current asset.
Example #3
Fresh mango company limited sold 2 dozen boxes of mangoes to Ms. Riya. One dozen boxes were sold for cash and another for credit of 90 days. Here the seller will record cash sales for one dozen boxes and another would be raised as receivable. The receivable would be shown as a current asset as the realization would happen in less than one year.
Example #4
Company XYZ sells $100 million of bearing parts to an auto manufacturer and gives that customer 60 days. Once Company XYZ receives the order, it will decrease its inventory by $100 million and increase its accounts receivable by $1 million. When 60 days has passed and payment is received, it will increase cash by $100 million and reduce its accounts receivable by $100 million.
Accounts Receivables in Cash Basis v/s Accrual Basis
When a company follows cash basis accounting, the receivables are not considered an asset as the cash is not yet received. However, in accrual basis accounting, receivables are considered assets as revenue is considered even if cash is yet to be received.
Importance
Receivables are important as they are part of current assets which is used to pay short-term business obligations. It gives a fair idea of the liquidity of the company when compared with current liability. While present in the balance sheet, the assets are placed in order of their liquidity. For example, cash will be placed first and prepaid assets will be placed last.
- Current assets include liquid assets, which can be easily converted in cash within one year of balance sheet date.
- Current assets include cash, cash equivalents, accounts receivable, inventory, current investments, and other liquid assets.
- Account receivables represent outstanding balance with the customers arising on account of the sale of goods or services and are realizable within one year, therefore, it is a current asset.
- Current assets are important as they are used to pay short-term business obligations.
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