An accounts receivable is nothing but a figure that a customer owes to the company and it is an asset as it is convertible into cash as and when the company receives cash against it and it is shown in the balance sheet as an asset item because accounts receivable probably is convertible into cash within a year.
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 as an example. The newspapers and magazines are provided to its customers daily, and the bill is due at the month-end. It 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.
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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. On a cash basis, only those transactions are considered as revenue where the cash is flown in and received. Therefore, accounts receivables cannot be considered as revenue as the cash is going to come in on a future date. If this is considered as cash in the cash basis of accounting, then it will be claiming for the revenue that is not received.
But if the company is following the accrual accounting, then receivables will be considered as revenue. It is because, under this method of accounting, revenue is considered as cash coming in when a sale is incurred.
Why is Receivable Recorded as a Current Asset?
Account 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, i.e., long term or short term, they will be recorded on the balance sheet and will play an essential role in determining the profit of the company.
Are Receivable Tangible Assets?
Accounts receivable are considered tangible assets. It may seem surprising since tangible assets are the ones that can be physically present like plant and machinery, land, vehicles, buildings.
Tangible assets are the ones that have a clear value and can be easily measured. Hence stocks and cash are also considered 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.
This article provides an answer to the question – Is Accounts Receivable and 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 –