Is Accounts Receivable an Asset?

In the financial assets of a business, accounts receivables are an important part. Account receivables are mentioned in your bank statement, and from an operations point of view, account receivables a crucial; customer-facing department. As a customer, you should know whether account receivables are an asset or not. This article will dive into details of accounts receivable and their liabilities.

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Are Account Receivables an Asset?

Accounts receivable is the money a customer pays to the company for the goods and services provided by the company. Account receivables are mentioned in the balance sheet of the company and are keenly observed during an audit of the company. When a customer clears the invoice, the due account receivable amount decreases and the cash reserves of the company increase. Accounts receivable are converted by a team dedicated to this purpose. An account receivable is an asset of the company and is recorded on the balance sheet of the company at the end of the financial year. Let’s first differentiate between an asset and a liability in accounting.

• Asset

An asset is anything that brings financial gains to the company.

• Liability

A liability is anything that costs the company money and is paid over a due course of time.

For example, the property and cash reserves of a company are assets because they bring rewards of financial gains to the company however, the liability is the salary paid to employees, interest debt paid or utility costs, rent, etc.

Assets and liabilities of a small business or large company can be current or long-term. Currently, these assets are referred that can generate cash quickly for the company.

For instance, cash, account receivables and inventory are current assets of a company, the jackpots of instant cash generation. Whereas property, plant and equipment (PPE) are long-term assets as they take time when sold and money is generated after a certain period. In the same way, liabilities which are to be cleared within a year are called current whereas liabilities which are due after a year are called long-term liabilities.

How to Treat Accounts Receivable on Your Books?

In accounting principles, accounts receivable are regarded as asset accounts and not revenue accounts. This is clear from the fact that accounts receivable are not recorded as cash entries in accounting methods because revenue is recorded only after the cash is received. In accounting procedures, revenue is recorded after the company has delivered the product or provided the services and expects to generate income from it. As the amount is yet to be paid by the customer, the account receivable is the outstanding cash amount owed by the company.

Since business is unpredictable and you can expect a growth boom or a downturn anytime, and you are most likely to miss a few of the receivable amounts from customers, businesses calculate an expected rate of failure or loss through allowance for doubtful accounts (AFDA). This is called contra-asset on the balance sheet and is recorded within the current assets section, so it reasonably reduces the amount of accounts receivable recorded earlier.

For instance, if the account receivable amount is 1M pounds, and you accept to not receive all the amount, the account receivable will be a certain limit. The AFDA is the amount you think you will not collect, meaning expected loss. If you don’t receive an amount from a customer, you will label it as a bad debt expense charged on your income and deduct this amount from the mentioned AFDA.

Importance of Accounts Receivable on a Company’s Balance Sheet

Accounts receivable is a crucial business indicator that makes your company stronger among its competitors. In general, accounts receivable is the measure of how efficiently a company is growing and also highlights the customer relationship. Accounts receivable is important in the aspect that it performs both front and back office functions.

• Accounts Receivable Remove Uncertainty in Cash and Working Capital Levels

The CFOs in accompany regularly monitor the account receivable amounts to calculate and predict the expected cash return in the company accounts. The account receivable reports indicate monthly losses as well. If the accounts receivable aging reports do not align with the automated accounting software that you are using, the cash flow picture will be inaccurate.  Fully digital and automated account receivable systems are a requirement of this era. An efficient account receivable system removes all the ambiguities and miscalculations and represents the data in understandable formats.

• Accounts receivable build stronger customer relationships

Account receivables help maintain stronger customer relationships. Mostly, companies take disputes between customers and the company as a problem, and in this scenario, the account receivables are a great way to dissolve the issue. This term is referred to as the communication gap between the account receivable team of the company, customers and other stakeholders of the company. The communication gap causes inefficiencies such as invoicing errors, incorrect payment terms, creating disputes between customers and the company. The digitised account receivable systems are a key communication benefiter between customer and company. This gives visibility to payable amounts and the cleared amount and indicates how well the customer relationship is building up.

• Accounts receivable reduce collection costs

According to research by APQC, every year, companies spend a certain amount in invoice processing. This amount includes the amount spent on chasing customers for the invoices that went overdue. If the cost-chasing process is not done efficiently, companies experience huge losses, and the process itself becomes tedious for the company, impacting the brand impression as well. Digital account receivable systems send automated reminders to the customers, eliminating the communication gap and making payment easier through self-service payment portals.

Conclusion

Accounts receivable is an asset for the company, which in other words is a current asset generating cash instant for the company. It is a strong indicator of the company’s growth. It also indicates how well the customer relationship is building up and helps make it even stronger. The digitised account receivable system gives insight into their payable amounts and the amounts that have already been cleared. These systems service portals make invoice clearance easier.

Disclaimer: All the information provided in this article on are accounts receivable an asset, including all the text and graphics, is general in nature. It does not intend to disregard any professional advice.