accounts receivable Cash Flow Cash management
5 mins read

Is accounts receivable an asset or liability?

Is accounts receivable an asset?   

Yes, accounts receivable is considered an asset because it is money owed to a company. It should result in cash inflow for the company in the near future. In terms of financial statements, if you reviewed a company’s balance sheet, any money owed to it, i.e., accounts receivable, would be recorded as an asset.  

What is accounts receivable?  

There are several often-misunderstood points around accounts receivable. Is accounts receivable a current asset? Is accounts receivable an asset or revenue? Is accounts receivable considered an asset or a liability?   

To help you understand the answers, we’ll go back to basics and first look at what accounts receivable is. Extending credit to customers for goods or services purchased is a key strategy at the heart of many businesses. It not only is a gesture of goodwill, giving your customers breathing space ahead of having to make full payment, it is a strategic move that allows a business to engage with a wider group of customers who might not otherwise have had the funds at hand, or the desire to pay in full ahead of receiving the goods ordered.  

Where does accounts receivables fit in to this? Accounts receivables is the name given to the process that covers the invoicing of customers for goods and services and all the following steps taken to recoup payment. Accounts receivable work involves tasks such as sending the initial invoice and/or statements to customers, sending reminder emails or SMS messages when payment hasn’t been made, calling customers to chase payment and when necessary engaging legal steps to recoup costs. Businesses excelling at accounts receivable tend to have an automation programme in place. 

What are the benefits of accounts receivable?  

Managing your accounts receivable well is crucial to the overall success of a business. If your accounts receivables is in poor shape, then it’s likely the business will be suffering from cashflow headaches and debtor problems.  

Benefits of strong accounts receivable flow throughout the business. With well managed accounts receivables your business should have:  

  • Good cashflow
  • Happy customers
  • Clear communication across customers, sales and accounts
  • Lower levels of bad debt
  • A reduction in human errors
  • Higher employee productivity  

What is an asset?  

An asset is a resource that delivers financial value to the business and can be converted into cash.  

Assets can be divided into two types, ‘current assets’ and ‘non-current’ assets. Assets are considered current if they are ‘liquid’, meaning they can easily be converted to cash. The test for this is usually whether they can be converted to cash in under a year or not.   

When assessing assets, there’s also another classification. If an asset has a clear value which can easily be measured, then it is considered a ‘tangible asset’. 

What is a liability? 

A liability, unlike an asset, is something you owe or have borrowed, an obligation. As with assets, you can have current liabilities and long-term (non-current) liabilities. Like assets, current liabilities are those which will be concluded within 12 months, whereas long-term/non-current liabilities are those which are not expected to be concluded for 12 months or longer. Just as accounts receivables and assets are crucial to the success of a business, liabilities have a major role to play in effectively running a business. Liabilities allow businesses to take advantage of the extension of credit from a supplier so that they can purchase and receive goods in advance of having to pay for them. This results in a smoother transfer of goods for both supplier and customer. 

Accounts receivable – liability vs asset?  

So, is accounts receivables an asset or a liability? Accounts receivables is an asset. In essence, it’s cash that should flow into your business. This means that it is considered an asset on your balance sheet. Payment terms for customers usually require payment within 30, 60 or 90 days and a strong accounts receivable process should enforce this. This means that accounts receivables are considered a current or ‘short-term’ asset.  

In addition to being a current asset, accounts receivables are considered tangible assets. Tangible assets are those which have a clear value and can be easily measured. As you agree payment terms and amount with customers prior to invoicing them, and there is a legal obligation for the customer to pay, accounts receivables meet the tangible assets test. 

To understand how well its accounts receivable team is managing the collection process, a business will often look at its accounts receivable turnover ratio. This calculation looks at how effectively a business collects on the credit it has extended – i.e., how good you are at getting your customers to pay their invoices. Alternatively, days sales outstanding is another measure used to understand how many days it takes on average for you to collect payment after credit has been extended. 

For a crystal-clear picture of assets vs liabilities, review the examples in the table below. 

AssetsLiabilities
Something your company owns (a car, machinery or equipment)Salary and wages for employees and contractors
Cash owed to you by customers (accounts receivable)Money you owe to suppliers (accounts payable)
InvestmentsTaxes owed
Inventory/Stock you holdMortgage debt
Real estateBank debt

What about bad debt? 

No business is immune to outstanding invoices and non-payment by customers. So where do accounts receivable sit when customers don’t pay? When a customer doesn’t pay, their debt is considered bad debt. Accounts receivables assets are offset by any bad debt a company has on their books. As you can’t predict with 100% accuracy what customers won’t pay, bad debt is accounted for on a company’s accounts via ‘doubtful debts’ or ‘doubtful accounts’. 

  • Allowance of doubtful debt is an estimate of how much you expect not to be able to collect during a given period. It can be calculated by looking at the historical averages of accounts receivable that you’ve been unable to collect. From this estimate, a business will set aside an allowance or provision to cover these bad debts and which balances against the accounts receivables assets on your balance sheet.  
  • When you do fail to collect on a debt, this will be a write-off as a bad debt expense. If this occurs, then the allowance or provision for doubtful debt must be reduced by the amount written-off.  

Dealing with too much bad debt? 

If you’re frustrated with the state of your accounts receivables or can’t afford to write-off bad debt anymore, talk to one of our team about CreditorWatch Collect. Easy-to-use and fast to set-up, CreditorWatch Collect helps you get paid faster, whilst saving you and your team from wasting time on manual accounts receivables tasks.

accounts receivable cash flow credit management finance small business SMEs tradereceivables
Lucy
Product Marketing Manager
Lucy joined the CreditorWatch marketing team in October 2022. With experience across government, media and SMEs she loves working with companies like CreditorWatch that enable businesses large and small to improve their processes and work smarter.
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