Is Account Receivable an Asset or a Liability?

Accounts Receivable Financing
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Hira Aziz
Entrepreneur, Pakistan

Is Account Receivable an Asset or a Liability?

🔥NEW Companies make sales or produce revenue in two main ways - through cash sales and through credit sales. When companies make credit sales, they are allowing their customers to make payments in the near future or by a particular future date. Account receivable is the cash amount the company will receive in the future for its credit sales.

Is Account Receivable an Asset or a Liability?

To clarify this, we need to first understand what is an asset and a liability?
  • An asset is something that the company owns or will get benefit from it in the near future.
  • A liability is something that the company owes and is obliged to do or make payment.
In account receivable, the company will receive its stuck amount in credit sales, which it owns. So, account receivable is an amount the company owns and will get in the near future. Thus, account receivable is an asset, while accounts payable is a liability where the company has to make payments.

Example of Account Receivable

XYZ manufacturing company manufactures automobile parts. In the month of August, the company makes a sale of $20,000 out of which 50% is credit sales. The account receivable journal entry would be as follows:

In the month of September, the company gets the full payment for its credit sales. Now, the adjusting entry would be as follows:

In Summary: Account Receivable versus Payable


  A Kahnesky
Manager, Denmark
 

Significance of Account Receivables (AR)

Account Receivable (AR) is a form of credit extended by the company to its vendors/customers for a short period of time....

 

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