Q:Is accounts receivable an asset or a liability?
A:Accounts receivable is the amount that is due to be paid to a business for a product or service. For example, assume a company called USA Caps makes baseball hats and ships an order to a retail store for sale. The retail store receives the hats and is given 30 days by USA Caps to pay for the hats. While USA Caps waits for the payment, the amount owned to them is considered an accounts receivable because it is money expected to be paid or received. On the other hand, the amount owned by the retailer is considered an account payable to the retailer.
So, is an account receivable an asset or a liability? Accounts receivable is an asset. To be more specific, it is considered a current asset because it is money that is expected to be received within one year. In contrast, an account payable is a current liability.
A business or accountant would record a $10,000 accounts receivable in a journal entry as follows:
When the business is paid $10,000 that was a receivable, the following journal entry will apply:
Keep in mind that there typically is not a contract or interest involved for accounts receivable. You do not have to worry about calculating interest that is to be received upon payment when dealing with accounts receivable.
While interest is not a factor, companies often offer sales discounts if payment is made early. A common discount is 2/10, n/30. This means that a 2 percent discount is given if payment is received within 10 days of the invoice date. The “n/30” means that the full payment is due within 30 days. We won’t get into the accounting recording methods of sales discounts at this time, but be aware that they do exist.
We should also mention that companies often include a bad debt expense in the books to account for uncollectible accounts. Keep in mind that this is an estimate because it is impossible to tell who will pay and who will default. This helps companies anticipate the potential reality of non-payment and aids in predicting future cash flow coming into the business.
Accounts receivable is an assets; therefore, companies can sell there accounts receivable to another entity called a factor. The company selling the accounts receivable sells the accounts at discount in exchange for immediate cash and elimination of the burden of collection.
There is a lot more to accounts receivable that businesses or accountants routinely deal with over the fiscal year. However, hopefully the above information answered a few questions you had regarding accounts receivable including if accounts receivable is an asset or a liability.