Is Accounts Receivable An Asset Or Liability?
November 5, 2012
November 5, 2012
Accounts receivable is a type of ledger entry in a company’s financial reporting that indicates moneys to be received. Specifically, accounts receivable, or AR, is created when one entity provides a service or product but has not received payment yet. For example, a propane company may fill tanks for its customers and leave a bill. The amount of uncollected money currently riding the books is the total AR.
If the propane company provided $300 worth of product to 10 homes on Monday, that would be $3,000 worth of AR. This company might allow customers to make payment within 30 days of receipt of the invoice. This means the AR is current for 30 days. Once a customer goes over the 30 days, the AR becomes aged and collection activities usually begin.
When marking AR amounts in a ledger or financial report, non-accountant business owners may wonder: Is accounts receivable an asset or liability? This amount is recorded on the books as an asset. It is money that a company expects to receive.
The fact that AR is treated as an asset means companies can borrow against it. This is known as invoice factoring and is a way some companies use to make it through slow cash months. With invoice factoring, an outside lending agency provides a cash loan up to a certain percent of open and current AR. When invoice payment is received, the debt is paid off with interest.
AR transactions often require a number of debits and credits to the general ledger. Consider a company that sells goods. When inventory is received, the price of the item is credited to the inventory account. If an item sells, the price is debited from inventory and credited to accounts receivable. Once payment is received, the amount is debited from AR and credited to cash or revenue. The order and manner of debits and credits depends upon the type of accounting used by a company.
When a company carries open AR, there is always a chance that payment will not be received. Customers could default on payment or decide to return a product. Accounting procedures must provide adjustments for these instances. A return might require debiting AR and crediting inventory. A write off debits the AR and credits a bad debt account.
All of this may sound very technical, and small companies certainly don’t need to invest in elaborate accounting systems. It is important to know that accounts receivable is an asset, however, especially when it comes to business reporting and taxes.