When a firm extends credit to its customers for the goods and services they offer, the total amount owed by the company is referred to as accounts receivable. But in financial terms, what are account receivables known as? It is recognized as an asset? If yes, then why is it considered an asset? Is it a current asset or a tangible asset?
In this article, you will be discovering details related to accounts receivable. However, it is first essential to know what are assets? A lot of things together are taken into consideration as assets. These include resources that are owned by the firm, prepaid expenses yet to be used or go past the expired date, as well as costs with a considerable future value. Examples include inventory, cash, vehicles, real estate, long-term investments, and others. Now let’s go ahead with the question, ‘Is accounts receivable considered an asset and its type?’
Is accounts receivable an asset?
Accounts receivable is considered an asset since it is described as money owed to a business by its customers. For instance, a company selling cars to its customers bills them at the time of closing the sale. The amount that customer owes to the car shop is recorded as accounts receivable on the balance sheet, thus making it referred to as an asset.
Why are accounts receivable considered an asset?
This answer is plain and simple. Accounts receivable is considered as the money that the company offering services is supposed to receive from its customers. The money owed by the company will later get converted into cash. More receivable stands for more cash, and this can lead to the development and growth of the business over the years.
Can you term accounts receivable as revenue?
This answer is slightly tricky. Whether you can convert accounts receivable as revenue or not is generally determined by the accounting technique used by the businesses. As per the cash base of accounting, transactions only result in cash that is being paid out or in revenue. Thus, in this case, accounts receivable will not be taken into concern as revenue. On the other hand, as per the accrual basis of accounting, revenue refers to the cash that flows into a business after the sale has actually taken place, making accounts receivable a revenue.
Is accounts receivable considered a current or tangible asset?
Now the final part of the question and the prime focus of this article, should you consider accounts receivable as a current asset or as a tangible asset? Accounts receivable can be termed both as a current and tangible asset. Current asset refers to those that get converted into cash within a span of one year, while tangible assets are such assets that come with an exact value that you can measure and estimate easily. Examples of tangible assets can be referred to as cash, vehicles, buildings, machinery, stocks, and others. Being an amount that companies prefer getting converted into cash in a short time span as well as one with an exact value, accounts receivable does perfect justice to both the term-current assets and tangible assets.
With all the matters being considered, it can be rightly said that accounts receivable are both current and tangible assets that can be summed up as revenue by your business depending upon the accounting method you adhere to.