When it comes to accounting, few things are more important than keeping your accounts straight and your books balanced. When it comes to running a business, few things are more important than keeping your assets straight and figuring out how to turn a profit. With accounts receivable, these two aspects of the financial and commercial world overlap.
Chances are good that, whether you are an accountant, a business person, or work in the corporate sector in any major capacity, you have heard of accounts receivable. That said, the question remains – is accounts receivable an asset? What are accounts receivable, why do they matter, and are accounts receivable an asset? How can and should you manage them to get the best results?
For those not in the know, accounts receivable is a term used to refer to the amount that is owed to a seller by one or more customers. Simply put, it is a legally enforceable term for the money you have due to you.
Notably, the answer to that initial question of “is accounts receivable an asset?” is yes – with the caveat that it can count as different kinds of assets depending on the nature of the payment.
Accounts receivable can be listed on your balance sheet for the year as either a current or long-term asset. In many cases, they are listed as a current asset, since chances are good that if you are listing something like an account receivable, you will be receiving payment for them only once, and within the year.
Accounts receivable do not typically extend past a one-year period. That said, if they do last for more than one year, they are instead recorded as long-term assets.
In this latter case, you may also wish to list them as a note receivable.
While no one ever wants it to happen, there is always the possibility that some accounts receivable will never be collected due to the customer in question defaulting on the payment or not paying due to other circumstances.
In this eventuality, the account and associated losses are put down via accrual-based accounting as an allowance of doubtful debts.
The name there says it all – you have reason to “doubt” you are going to receive this debt, and are thus making allowances in your recordkeeping accordingly. This can help you keep straight which debts are accounts receivable which you can “depend upon” being repaid, and which are more dubious.
The advantage of this system is clear. If you know how many outstanding accounts receivable you have, you can budget accordingly, knowing that they are, relatively speaking, “sure” things, rather than budgeting according to more “doubtful” debts and assets which may never materialize.
With the distinction between accounts receivable and allowances of doubtful debts clearly delineated, let’s take a look at a few other key points for noting and handling each.
Your balance sheet will likely be comprised of paid and unpaid receivables. In addition, your balance sheet is likely to include invoices from the current period as well as past pay periods. You will want to make sure all of these are clearly distinguished from one another on your balance sheet.
That said, due to accounts receivable being an asset that has not yet been converted into revenue, this discrepancy is likely to show up on your balance sheet, with your balance with the accounts receivable added likely being larger than your reported revenue for a given period. You will, therefore, want to be careful to check these two against one another to make sure that you know how much actual revenue you have at any given moment.
It is also important to note that accounts receivable only arise in instances where companies allow customers to pay via credit. When this is not the case, and all customers pay upfront, accounts receivable do not exist.
Finally, if you are analyzing a business’s health, one point you’ll want to compare are its accounts receivable balance against its revenue on a trend line. If you find the ratio to be declining, the company is likely experiencing cash flow or credit collection problems from clients.
That said, when properly understood and utilized, accounts receivable can be vital to a company’s long-term success. If you are in need of help with your accounts receivable, you can always engage a CPA firm like Sanjay Gupta & Associates, LLC. If you’d like to schedule a consultation, feel free to give us a call or send us an email today.
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