Is Accounts Receivable an Asset?

Posted at July 11, 2020 » By : » Categories : Accounting, Payroll, & Taxes »
is accounts receivable an asset

Accounts receivable can be a frustrating area. With 48% of customers delaying payments, it can often feel like accounts receivable is a liability rather than an asset. If accounts receivable turns into bad debt, then this becomes a company loss.

However, before that happens, accounts receivable should not be considered a liability. Which begs the question, is accounts receivable an asset?

To properly leverage your accounts receivable, it is important to know whether it is an asset, and how to leverage accounts receivable to increase cash flow for your business.

If you want to learn more about accounts receivable, read on.

What Is Accounts Receivable?

Before we get into whether or not accounts receivable is an asset, let’s take a quick look at the definition of accounts receivable.

Accounts receivable is the total amount of what all your debtors or customers owe you. Any amount due for products sold or services rendered on credit is part of accounts receivable.

Is Accounts Receivable an Asset?

Now for our primary question—is accounts receivable a current asset?

Because accounts receivable represents money that is due to come into your business, if you are using the accrual-based accounting method then it falls as a current asset.

The reason it is a current asset is because receivables are expected to be collected within the year. Across most industries, 120-day terms are considered to be the upper limit. Payment terms generally fall between 30, 45, or 60 days.

When Is Account Receivable Not Considered an Asset?

Although accounts receivable is a current asset—if you use the cash-based system of accounting, this changes things. Why? Because on the cash-based system of accounting, revenue is only realized when cash is received. Therefore, under a cash-based accounting system, there should be no accounts receivable.

If you create an account for receivables, this means you will be booking income that has not been realized yet, which does not match the cash-based accounting method. Take note that cash-based accounting also does not include the use of accounts payable.

Is Accounts Receivable Ever a Liability?

No. As much as it may feel like it, accounts receivable is never a liability. However, extending credit to customers can come with pitfalls, such as constricted cash flow.

What’s more, if a customer account becomes overdue, and payment is not made, the sum that is owed is converted to bad debt. Within the books, the amount is subtracted from the accounts receivable account (dropping the balance) and shifted to the bad debts account.

Bad debts are treated as a business expense. However, the business is free to continue seeking payment. If the customer does make payment on their account, this will drop the balance of the bad debt account on the business’s books.

How to Turn Receivables Into Cash Through Invoice Factoring

There is no getting around the fact that burgeoning accounts receivable totals can be detrimental to businesses. It can chokehold your cash flow, to the point where small businesses can be at risk of experiencing negative cash flow. Even when they have earned enough revenue to cover all of their expenses and turn a profit.

Besides impacting cash flow, accounts receivable that become bad debts can also create substantial expenses for businesses. Statistics show that 93% of companies receive late payment on outstanding accounts, and that, on average, businesses write off approximately 1.5% of their accounts receivable as bad debts.

If you have a lot of outstanding accounts on the books and are suffering from cash flow issues as a result, one way to avoid these AR associated problems is to look into accounts receivable financing.

The way this works is simple. AR financing entails selling your accounts receivable (as it is an asset) to a lender that does invoice factoring. This factoring company will generally pay you around 85% of the value of your AR upfront.

After this, they then proceed to collect on the money owed. Once this is completed, they will send you the remaining 15% of the AR value, minus their stipulated fees.

Different lenders have different fees and payment schedules. However, you can generally expect to receive 85% to 90% upfront, as this is a common standard in the industry.

The Pros and Cons of Invoice Factoring

Invoice factoring is a great solution if you want to quickly improve your cash flow. You don’t need to undergo credit checks, as lenders will focus on the credit worthiness of your customers, not you. What’s more, by handing over your receivable accounts, you will also be passing on the associated debt collecting responsibility.

In many cases, this can free up time and energy to devote to other areas of your business. What’s more, factoring companies are often better able to get stubborn customers to make payments on overdue accounts. One main drawback of accounts receivable financing is that it may cost you more than a traditional loan.

In some cases, you may want to look at getting a working capital loan instead. The other potential disadvantage to invoice factoring is that you will no longer have control over your accounts receivable. If the factoring company compromises your relationships with your customers through unprofessional practices, you can’t do anything about it.

Although these two cons are something to consider, accounts receivable financing can be an invaluable solution to tight cash flow as a result of inflated accounts receivable.

Do You Need Accounts Receivable Financing?

Is accounts receivable an asset? It most certainly is. In fact, you can even use it to leverage capital and enhance your cash flow. If accounts receivable has gotten out of hand, and your cash flow has suffered as a result, it might be a good idea to look into invoice factoring.

The key to avoiding high factoring fees is to shop around. If you want to start comparing accounts receivable financing solutions today, we have you covered. Simply fill out our 2-minute business loan application, and you will be matched with a selection of factoring companies, all competing to earn your business.