Is Accounts Receivable a Revenue or An Asset?

In accounting, the terms revenue and asset are often used interchangeably. However, there is a key distinction between the two: an asset is something that generates cash flow, such as a manufacturing plant or a piece of real estate.

Revenue, on the other hand, is simply what a company receives in exchange for goods and services sold. 

Is Accounts Receivable an Asset?

Accounts receivable is an asset. This is because it represents the portion of a company’s revenues that have yet to be collected. The company records this as an asset on its balance sheet, representing money that the company is owed.

In other words, accounts receivable is the total value of money that a company is owed by its customers for products or services that have been delivered, but have not yet been paid for.

For example, suppose a utility company invoices their clients when they need electricity. The sum owed by the user to the utility company can be accounted for on the accounts receivable account. Therefore makes that account an asset. This is because the utility company expects payments for the services provided.

Why is Accounts Receivable an Asset?

An asset is something that a company owns and expects to generate future economic benefits. Since accounts receivable is money that customers owe to the company, the account receivable represents a future financial benefit.

The fact that this money is owed to the company gives it a certain level of security, as it represents future revenue that the company can expect to receive.

In good faith, a company can then classify accounts receivable as an asset on the company’s balance sheet as it’ll generate income in the future.

What are Accounts Receivables?

Accounts receivables (AR) are a company’s outstanding invoices that have yet to be paid. This is an important asset for a company, as it represents money owed to them and expects to be paid in the future. 

The company’s accounts receivable balance will decrease as customers pay their invoices, and it will increase as new invoices are created.

The money owed to a company is typically tracked in a company’s accounts receivable ledger. Although accounts receivable is an asset, a company may want to keep this as low as possible to maintain a strong cash flow.

Accounts receivable is an example of an accrual basis of accounting. Its income from a sale or service is paid through credit, which means income is deferred to a later date. It is usually reported as a current asset because payment is expected within one year.

If an accounts receivables balance is held for more than one year, it is then converted to a long term asset on the balance sheet.

What is an asset?

Assets are tangible or intangible valuables that companies own or finance, representing future economic value.

Current assets include short term firm assets, such as accounts receivables, inventory, and prepaid expenses. Current assets turn into revenue once converted to money within one year.

Fixed asset: Fixed asset means long term assets of the company which the company cannot immediately swap for cash. Properties and equipment can be seen as an example of fixed assets.

Can accounts receivable count as revenue?

Accounts receivables are asset accounts rather than revenues. Under accrued accounting, you must also account for deferred income as accounts receivable, not revenue. You also have to record deferred payments as accounts payable.

Under the Cash Basis of Accounting Principles, all transactions involving cash paid or withdrawn represent revenues. So the receivables would not count as revenue. 

In the accounting system, the income derived from sales is referred to as cash coming into the business and is deemed to make your accounts receivable revenue.

Where is Accounts Receivable on the income statement?

Accounts receivable are not on the income statement. An income statement represents revenues received, not money that hasn’t been paid yet. You will find accounts receivables on the balance sheet as a current asset and on the cash flow statement as an adjustment to income but not on the income statement.

Accounts Receivable – Accounting Process

The accounts receivable (A/R) accounting process begins with recording customer transactions in the accounting system. Sales invoices are created and posted to the A/R account, and cash is recorded when it is received from customers.

The cycle then progresses to collecting payments from customers, which is also recorded in the accounting system. The final step in the A/R process is the payment of any outstanding invoices, which reduces the A/R balance.

Projecting Accounts Receivables (A/R)

Projecting accounts receivables is a process of estimating the amount of money that a company expects to receive from its customers in the future. This process typically involves forecasting sales and then calculating the amount of receivables that will likely be generated from those sales.

Projecting accounts receivables is based on past sales patterns and current trends. This information can be used to decide whether or not to offer credit to new customers, what level of discounts to offer, and when to extend payment terms.

What happens if my clients don’t pay?

Suppose a company’s clients do not pay their accounts receivable. In that case, the company can reach out to clients until they pay or take legal action to recover the money owed.

If all fails, the company may also be forced to write off the amount as a loss. This can have a negative impact on the company’s financial health and its ability to repay its debts.

Here are a few things you can do to avoid non-payments.

Develop a Crystal-clear Credit Policy

Develop crystal-clear instructions for when payments must be paid. Provide a straightforward payment term so your customers can follow.

If customers fail to follow payment terms, refuse future credit purchases to some customers immediately. Vet new customers, request upfront deposits on larger purchases and charge interest on payments made before the deadline.

Give Customers More Ways to Pay

If you offer only limited payment options, customers will be prone to drag their feet once a payment deadline arrives. Some credit card transactions require additional charges, so be aware of these ahead of time.

Allowing a customer to pay using their bank card, PayPal, automatic withdrawal, cash app, or other means is typically a win-win. You’ll be paid faster, and your customers will be able to choose the option that works best for them.

Offer a Financial Incentive

If you offer incentives such as discounts on invoice payments within 15 days, you can get paid faster and lower your customers overall costs. In the absence or lack of payment, you may add a late payment fee to discourage late payments.

Call Clients and Schedule Regular Reminders

Just talking to a customer and asking for payment can sometimes be the push they need for them to pay. Keeping reminder emails on hand every week for your customers is another way to jog your customers’ memory.

Conclusion

Accounts receivable is an asset and can be found on the balance sheet. It can be recorded as a long term asset or current asset depending on the length of time the balance is due. 

If an asset account is converted to cash in less than a year, it is considered a current asset. If it is converted to cash beyond one year, it is a long term asset. 

Accounts receivable run on the accrual basis of accounting and are deferred payments on goods and services. So, why is accounts receivable an asset? Well, it’s an intangible valuable company’s own expecting future payments.