× Freshbooks App Logo
FreshBooks
Official App
Free - Google Play
Get it
4 Min. Read

Is Accounts Receivable an Asset?

When a company extends a credit for goods and services provided to their customer, the amount owed to the seller is known as accounts receivable. Since this amount is convertible to cash on a future date, accounts receivable is considered an asset. On a balance sheet, accounts receivable is considered a current asset, since it is usually convertible into cash in less than one year.

If the receivable is converted into cash after more than one year, it is recorded as a long-term asset on the balance sheet (possibly as a note receivable). There is also the possibility that some receivables will never be collected, the account is offset by an allowance for doubtful accounts (under the accrual basis of accounting). This allowance estimates the total amount of bad debts related to the receivable asset.

In this article you will also learn about:

Is Accounts Receivable an Asset or Equity?

Are Accounts Receivable Included in Income Statement?

Is Accounts Receivable an Accrual?

Is Accounts Receivable an Asset or Equity?

Assets are what a company owns, liabilities are what it owes other and equity is the difference tween the two.

Assets are a company’s resources that the company owns. Examples of assets include cash, accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment and goodwill.

Accounts receivable is an asset account that is not considered equity but is a factor in the formula used to calculate owner equity.

Assets – Liabilities = Owners’ Equity

Owner’s equity reports the amounts invested into the company by owners plus the cumulative net income of the business that has not been withdrawn or distributed to the owners.

Are Accounts Receivable Included in Income Statement?

The gross amount recorded for the sales of goods and services is revenue. This amount is shown on the top line of the income statement.

In the accounts receivable account, the balance is comprised of all unpaid receivables. This means that typically the account balance includes unpaid invoice balances from both prior and current periods. So, the amount of revenue reported in the income statement is only for the current reporting period. Therefore, accounts receivable balances tend to be larger than the amount of the reported revenue in any reporting period, especially if payment terms are extended for longer than the duration of the reporting period.

Is Accounts Receivable an Accrual?

Often in business, money is regularly earned before it’s received. The gap between earning a dollar and having that dollar in your hand could take seconds or months, depending on your business. Extending credit to a customer for goods and services and giving them time to pay you is called accrued accounting. This method is called accrual accounting and includes both accounts receivable and accrued revenue. A company’s billing cycle indicates the difference between the two.

Accrued Revenue

This money your company has earned but hasn’t yet billed your customer for. On the balance sheet, it is represented as a current asset. Accrual-basis accounting allows companies to record revenue on their income statement as soon as they have done everything required to earn it.

Accounts Receivable

This is revenue that has been both earned and billed but not yet received. You send a customer an invoice, once the customer receives the bill – it becomes an accounts receivable, another current asset. While you don’t have cash in hand, you’re farther along in the process of getting it. Once your customer pays, you shift that money from accounts receivable to your cash balance.

Accrual-basis accounting works to accurately show a company’s business ativity. Under cash accounting, a company records revenue only when it receives cash payment from customers. That can give the impression that the company’s revenue goes through long periods without earning any money at all. In accrual accounting, accrued revenue and accounts receivable entries allow a company to recognize revenue and place it on the balance sheet as it earns the money.

RELATED ARTICLES

Save time Billing and Get Paid 2x Faster with FreshBooks

Try FreshBooks Free