Accounts receivable (AR) are an important part of a company’s financial picture. You can find a company’s accounts receivables on its balance sheet, which is the financial statement that provides a snapshot of an organization’s financial standing. A balance sheet lists a company’s assets and liabilities, including accounts receivable and accounts payable. Balance sheets help investors and other important stakeholders understand the current equity and financial health of a company. 

But what exactly is an asset and liability, and what falls into those categories? In this article, we’ll explain key questions like is accounts receivable an asset and is accounts receivable a revenue?

What is the difference between an asset and a liability?

As a business operator, it’s critical that you understand the difference between an asset and a liability to be able to correctly read and interpret a balance sheet. This will provide you with a better understanding of the state of your accounts receivable and accounts payable. 

Even if you have an accounting team or accountant supporting the finance department at your business, becoming fluent in these terms will help you make more informed decisions and understand the full scope of what’s happening in your business.

What is an asset in accounting?

Your company’s assets can be found on the balance sheet. Think of assets as anything your company owns or controls directly that is worth a value or could produce value. Assets could also be something that will help reduce expenses, create income or cash flow, or increase sales.

What are the different types of assets in accounting?

  • Current assets are able to be converted to value in the short term like inventory, cash, or accounts receivable (spoiler alert, accounts receivable is a current asset!)
  • Fixed assets are longer-term assets that may take longer to realize value from. This could include company equipment, buildings, or facilities. 
  • Financial assets consist of things like bonds, equity and stocks that may generate value for a business.
  • Intangible assets could include a company’s trademarks or copyrights. Anything that isn’t physical but still has an economic value to the company.

What is a liability in accounting?

The other half of the balance sheet outlines a company’s liabilities, which are the opposite of assets. Liabilities are sums that a company owes or will have to pay out. Liabilities are settled through the transfer of something of value, like money, providing a service, or physical goods.

What are the different types of liabilities in accounting?

  • Current liabilities are typically due within a year’s time and are made up of things like payable wages, dividends, interest, etc.
  • Non-current/long-term liabilities are expenses that won’t be paid for over a year. Some examples of business non-current liabilities are employment benefits for previous employees, warranties/quality promises, and deferred credits.

Is accounts receivable an asset or liability?

Now that you have a deeper understanding of what assets or liabilities are on the balance sheet, you can understand whether accounts receivable is an asset or liability.

The answer is accounts receivable is an asset. Think about it this way. 

Accounts receivable is money that is owed to you and therefore, can’t be a liability. According to a balance sheet, accounts receivable are considered an asset even if you haven’t physically collected that money yet. 

This underscores the importance of a good accounts receivable collection and dunning process. Because, even though receivables are listed on the balance sheet, you need to ensure that they are collected to keep cash flow steady and predictable. 

Is accounts receivable a revenue in accounting?

Whether you consider accounts receivable revenue depends on the type of accounting method you follow. There are two main types:

  • Accrual-based accounting: Revenue is recognized when the income is earned (when the invoice is sent.)
  • Cash-based accounting: Revenue is only counted once cash is received.

Most businesses use accrual-based accounting, which means that you can count accounts receivable as revenue and list them as such on your income statement.