Is Accounts Receivable Recorded as an Asset?
Accounts receivable represent the amount of credit that the customers who have brought your products and services owe you. It results in the cash coming in your business for the goods and services provided in the future date and therefore this makes it an asset for your business.
Let’s consider a newspaper agency for an example. The newspapers and magazines are provided to its customers on a daily basis and the bill is due at month end. This is Accounts receivable for the newspaper agency and is considered an asset.
There is a certain risk involved in this like late payments as well as the default. However, it can help the company’s assets grow as well as increase the goodwill.
Why are Accounts Receivable Considered as an Asset?
Assets for business means anything that adds value. The more receivables the business receives the more assets the company gains, This will lead to the growth of your business over time
The question is how will this growth occur. There are two reasons for this –
- Value of Assets: These assets can be transferred, they can also be sold and can also be used as a tax advantage. All these factors make the business strong and help in improving the operations
- Revenue Generation: These assets can be invested in the business in more ways than one and help the business to generate more revenue and be profitable
However, accounts receivables are not considered as revenue if the business is following the cash basis of accounting. In cash basis, only those transactions are considered as revenue where the cash is actually flown in and received. Therefore, accounts receivables cannot be considered as revenue as the cash is actually going to come in on a future date. If this is considered as cash in cash basis of accounting then will be claiming for the revenue that is not actually received.
But if the company is following accrual basis of accounting then receivables will be considered as revenue. This is because under this method of accounting revenue is considered as cash coming in when a sale is incurred
Why are Accounts Receivable Recorded as a Current Asset?
Accounts receivables are mostly converted into cash in less than one year and therefore classified as current assets. If they were converted in cash after more than one year they would have been termed as long term assets. Either of this ie long term or short term they will be recorded on the balance sheet and will play an important role in determining the profit of the company.
Are Accounts Receivable Tangible Assets?
Accounts receivable are considered tangible assets. This may seem surprising since tangible assets are the ones which can be physically present like plant and machinery, land, vehicles, buildings
Tangible assets are the ones which have a clear value and can be easily measured. Hence stocks and cash are also considered as tangible assets. For example, when a company gives goods on credit they also give a bill to be paid. It defines the payment period when the bill needs to be paid. They must legally commit to this bill. This commitment by the customer to your business can be considered as a tangible asset.
Please note that tangible assets differ from intangible assets. They differ because intangible assets do not have physical worth. Intangible assets include patents, technology, goodwill, relationships, and software
Accounts Receivables is an important aspect for the businesses fundamental analysis. They are a part of current assets and are a measure of companies liquidity and also measure its ability to cover short term obligations without taking in more cash. Accounts receivables are most often measured in terms of turnover ratio called Accounts Receivables Turnover ratio. This ratio measures the time’s company has collected account receivables. This ratio is then used to calculate days in sales outstanding which measures the number of days it takes for the company to collect accounts receivables
This article provides an answer to the question – Is Accounts Receivable an Asset?. Here we explain the rationale behind its classification as Assets (Current Assets) with examples. You can learn more about Accounting from the following articles –