Is Accounts Receivable Considered an Asset?

Yes, accounts receivable is considered an asset. Money owed to a business is considered pending revenue and contributes towards a company's value.

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This kind of accounting question can get complicated though, so keep reading to learn:

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• What are accounts receivable?
• What are assets?
• How to classify accounts receivable.
• Whether or not accounts receivable are assets.
• How accounts receivable benefit your business.

What is accounts receivable?

Accounts receivable is the technical term for unpaid invoices. Accounts receivable are sometimes referred to as A/R, unpaid invoice balances, accounts payable, or accounts pending.

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In addition to representing future revenue, unpaid invoices can also be sold to a factoring company or used as collateral for invoice financing.

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Understanding Assets in Accounting

An asset is something owned by a company that does (or can) bring economic benefit.

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There are several different types of assets, including:

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• Current (or short-term). These resources either are cash or can be converted into cash within a year. 
• Fixed. Fixed assets have an anticipated lifespan of over a year, and they depreciate over time. For example, a truck would be a fixed asset as it can continue to generate income for over a year, but its value depreciates over time.
• Financial. Financial assets include investments, stocks, bonds, equity, and so on. 
• Intangible. Intangible assets are resources that don’t have a physical presence. For example, a patent is an intangible asset, as are trademarked or copyrighted properties.‍
• Impaired. Impaired assets are assets that aren’t behaving as they should, making their value harder to recover than usual.

Classification of Accounts Receivables

Because accounts receivable represent pending revenue, they can often be sold or used as collateral and are therefore typically classified as current assets.

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However, if collecting payment on an invoice is proving difficult and it becomes less likely the business will be paid, the asset is typically reclassified as an impaired asset. While still considered an asset, the value is less than an invoice in good standing. If it becomes clear that the invoice will never be paid, the impaired asset gets reclassified as bad debt and becomes an expense.

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The Importance of Accounts Receivables as an Asset

The accounts receivable of a company provide important insight into a company's health. If it is growing too quickly, it can signal concern as it may mean that older invoices aren't being paid and that they may need to be reclassified as impaired assets.

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However, a shrinking accounts receivable can also be a cause for concern. Rapidly declining accounts receivable can mean that while the company's cash position is fine now, the company might be in trouble in the coming months.

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Because of this, it's important that a company's management team keeps a close eye on their accounts receivables. While accounting software is commonly used for small businesses, more robust software such as Enterprise Resource Planning (ERP) software programs like Sage is frequently used for larger businesses and enterprise grade companies.

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Final Thoughts

While accounts receivable are considered an asset, it isn't a stable one. If clients or customers aren't able or willing to pay their invoices on time, accounts receivables can become impaired assets or even expenses.

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And while cash is the lifeblood of any business, management should consider accounts receivable a leading indicator of the company's future cash position.