A company’s Balance Sheet may show various balances. Companies break up their balances into three categories. These are assets, equity, and liabilities. Each of these represents different aspects of a business. The classification comes as a result of the accounting standards.
One balance that often is a part of the Balance Sheet of a company is its accounts receivable balance. Before understanding whether the accounts receivable is an asset or not, it is crucial to differentiate between assets, liabilities, and equity. Similarly, it is necessary to know what accounts receivable is as well.
What is an Asset?
An asset is a resource owned or controlled by a company that generates future economic inflows. There are various balances that classify as an asset for companies. These may include things of value or resources that the company owns. Similarly, it may also include accounts owed to the company over which it has control. However, for companies to recognize assets, they must know their value.
Any balance that matches the above definition is a part of a company’s assets. Assets are different from other elements of the Balance Sheet. Firstly, they are the exact opposite of liabilities. While assets are resources that result in future economic inflows, liabilities are obligations. Liabilities come with expected future economic outflows.
The other element of the Balance Sheet is equity. Anything that does not qualify as an asset or liability constitutes equity. In technical terms, equity is the residual amount after deducting a company’s assets from its liabilities. Usually, it represents capital introduced by a company’s owners, profits or losses, and other reserves.
Companies may also further classify their assets into two categories. These may include current and non-current assets. The classification comes due to each asset’s life. If companies expect to use an asset for more than 12 months, they can classify it as non-current. On the other hand, current assets are resources that a company owns or controls for 12 months or less.
What is Accounts Receivable?
Accounts receivable is a balance that represents any money owed to a company by its customers. Any company that transacts in credit sales will always have an accounts receivable balance. Most companies classify their accounts receivable as current assets. Therefore, accounts receivable balances are assets.
The reason why accounts receivable balances are assets is that they meet the definition given above. Accounts receivable is a resource that a company owns. Similarly, accounts receivables result in future economic inflows, in the form of receipts from customers. Lastly, the value of an accounts receivable balance is easily measurable using sale proceeds.
These are the three parts of the definition of an asset that accounts receivable balances satisfy. Similarly, most accounts receivable balances are short-term. It is because companies usually allow credit terms for 1-2 months to customers. Therefore, these balances represent amounts that the company expects to realize in 12 months. That is the reason why they classify accounts receivable balances as current assets.
Assets are resources owned or controlled by a company which results in future economic inflows. They must also have a measurable value for companies to recognize them. Since accounts receivable balances satisfy all the above requirements, they are assets. Usually, accounts receivables are short-term and, therefore, classified as current assets.