Is accounts receivable an asset or revenue?
/What is Accounts Receivable?
Accounts receivable refers to money due to a seller from buyers who have not yet paid for their purchases. The amounts owed are stated on invoices that are issued to buyers by the seller. The issuance of an invoice implies that the seller has granted credit to a customer. The total amount of accounts receivable allowed to an individual customer is typically limited by a credit limit, which is set by the seller's credit department, based on the finances of the buyer and its past payment history with the seller.
Is Accounts Receivable an Asset?
Accounts receivable is an asset, because it represents money owed to a company by its customers for goods or services delivered but not yet paid for. Since the company expects to receive cash from customers in the future, accounts receivable has value and is considered a resource controlled by the company. Since it is typically collected within a short period of time, it is usually classified as a current asset on the balance sheet. Although accounts receivable is an asset, it is not as liquid as cash, as it depends on customers fulfilling their payment obligations.
Is Accounts Receivable Revenue?
Accounts receivable is not a form of revenue, though it was created as the result of a revenue-generating event - that is, a sale transaction occurred on credit at some point in the past, which resulted in the creation of the accounts receivable asset. The sale transaction resulted in a revenue entry in the accounting records (a credit) with an offsetting debit to create an account receivable. The receivable may not be settled for some period of time after the revenue was recognized.
Presentation of Accounts Receivable
Accounts receivable is listed as a current asset on the balance sheet, since it is usually convertible into cash in less than one year. In the rare cases in which an account receivable is not to be collected within the next year, it is instead presented as a long-term asset. If your business is using the accrual basis of accounting, then the accounts receivable line item is usually paired with and offset by an allowance for doubtful accounts. This allowance contains an estimate of the total amount of bad debts related to the receivable asset. The net reported amount of the gross receivable and the allowance is the amount of receivables outstanding that management actually expects to collect.
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How to Analyze Accounts Receivable
Anyone analyzing the results of a business should compare the ending accounts receivable balance to revenue, and plot this ratio on a trend line. If the ratio is declining over time, it means that the company is having increasing difficulty collecting cash from its customers, which could lead to financial problems. This situation may arise when a business increases the amount of credit it is offering to riskier customers, or when it spends less money on collections staff.
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