Is accounts receivable an asset or liability? Everything you need to know

Most businesses offer their customers the convenience of buying on credit. That’s great for sales, but it also means you need a solid process in place to make sure you actually see that money. Good accounts receivable (AR) management helps you stay on top of payments, while building better customer relationships.

In this post, we’ll answer a key question—Is accounts receivable an asset or a liability? We’ll also explain why AR is so essential to your company’s financial health. Then stick with us for some practical tips on how to make the most of your AR process.

Here’s what we cover:

Is accounts receivable an asset?

So, accounts receivable: asset or liability? When you see “accounts receivable” on your balance sheet, it’s referring to money you’re owed by customers. If a client purchases goods or services on credit, the amount they owe is recorded under AR. Legally, they’re on the hook to pay, which means that amount has (or should have) real economic value to your business—making it an asset.

Think of it this way: if you sold something for cash, you’d have immediate funds in your bank account. With AR, that cash is coming soon, just not right this second. But the money is on its way, and that makes AR an asset with future economic potential.

You might also hear it described as Net Realizable Value (NRV). However, remember that there’s no absolute guarantee that every invoice will be paid in full, on time—hence the need for a good AR process.

Is accounts receivable a liability? 

In short, no. A liability is something your business owes to someone else, like what you pay your suppliers or any outstanding debts. Accounts payable (AP) is the opposite side of the coin: it’s how you track your owed payments to others. Since AR is money you’re set to receive, it’s not a liability.

Why is accounts receivable an asset?

Every time you sell a product or service and bill your customer, the transaction is in your favor – meaning, you’ll have cash coming your way. Once the customer pays, that amount is converted into actual revenue. Plus, many lenders will consider your AR as collateral if you need a business loan. In other words, if your customers have a strong track record of paying on time, that’s a valuable, short-term asset you can leverage.

Is net accounts receivable a current asset?

Yes. A current asset is something you can convert to cash fairly quickly—usually within the year. Because invoices tied to accounts receivable typically get paid (and hopefully sooner rather than later), they’re considered current assets. On the other hand, properties or long-term investments that might take years to liquidate are referred to as long-term assets.

How does accounts receivable help businesses?

Simplify cash flow and revenue generation

Accounts receivable gives you a predictable cash flow, as you’ll know when payments (which become revenue) are due. As AR is a current asset, it contributes to your liquidity—so you can fulfill your obligations in the short term without needing extra cash flows. With efficient cash management, you can also invest in growth with confidence.

Reduce bad debt and collection costs

If payment for accounts receivable is never received, it’s listed as a bad debt. But a strong AR process helps avoid this, as you can easily see which customers are good payers and only extend credit to them. This also helps to reduce collection costs, which include chasing up overdue invoices. 

Strengthen customer relationships

By allowing customers to make purchases on credit, you’ll increase sales and customer loyalty—and loyal customers are more likely to pay on time. As long as you provide clear payment terms and instructions (and remain polite in your reminders), you’ll be able to develop strong relationships.

An accounts receivable example

Here’s an example of how the AR process works in five steps:

1. Your company sells a service to Customer X for $5,000.
2. You send Customer X an invoice for this amount, with payment terms stating a credit period of 30 days.
3. You record the $5,000 under your accounts receivable. (Meanwhile, Customer X marks $5,000 under their accounts payable).
4. When Customer X pays, that amount becomes realized revenue in your books.
5. You then note the payment in your ledger, removing the $5,000 from your unpaid receivables.

Best practices for optimizing the accounts receivable process

Staying on top of AR goes beyond simply sending out invoices. Here are some tried-and-true strategies to keep the money rolling in on time.

Make use of automation

Automate everything from sending recurring invoices to issuing payment reminders. Modern software can record payments automatically and make reconciling accounts receivable and accounts payable a breeze, so your finance team can focus on higher-value tasks.

Simplify payment procedures

Spell out your credit policies and payment terms in plain English. Offer multiple ways to pay (credit card, checks, ACH transfers, etc.) to reduce friction. You can also introduce incentives for customers who pay early.

Track efficiency with KPIs

Monitor key metrics, such as:

• Collection effectiveness index (CEI): how efficient your collection process is
• Accounts receivable turnover (ART): how many times you collect average accounts receivables per year
• Day sales outstanding (DSO): time taken to collect payment after issuing invoice
• Average days delinquent (ADD): how long overdue invoices remain unpaid, on average
• Percentage of high-risk accounts: how many customers are likely to pay late
• Bad debt to sales ratio: the ratio of unpaid invoice amounts to overall sales
• Write-off ratio: the percentage of accounts receivable written off as bad debt
• Operational cost per collection: how much it costs you to collect payments

Simplify accounts receivable with the right accounting software

The best way to simplify accounts receivable is to use the right accounting and financial management software. With advanced features and automation, you can save time and money and easily keep track of all invoices and payments.

For example, Sage accounts receivable software automatically generates recurring invoices, reconciles payments, and sends customer reminders. The AR ledger auto-updates when you receive payment, and there’s automated transaction posting to your general ledger and AR ledger.

You can link documents to customer accounts and connect the cloud-based software to your banking systems and business tools such as CRMs. With multi-currency support, online payment options, and advanced reporting features, Sage has all you need to streamline the AR process.

Bottom line?

Accounts receivable is definitely an asset—but it only truly benefits your business when it’s well-organized. Implement a smooth AR process, keep an eye on key metrics, and use top-notch software to stay on top of every invoice. By doing so, you’ll keep your cash flow healthy, your customers happy, and your business primed for growth.