This post was originally published in September 2021 and was updated with additional information in December 2024 and September 2025 to reflect the latest insights on accounts receivable and balance sheets.
What is accounts receivable?
Accounts receivable (AR) refers to the outstanding payments your customers owe for products or services they’ve already received. When your company extends credit terms to customers, the resulting unpaid invoices become accounts receivable. AR is considered a current asset on your balance sheet that’s expected to convert to cash within your normal business cycle, usually within a year. Think of AR as a financial bridge between delivering value to your customers and receiving payment. For AR teams, actively managing this asset through strategic billing practices, credit assessments, and collections processes is essential for maintaining healthy cash flow and supporting business growth.
Read the blog → What is accounts receivable? Definition, importance, and examples
What are assets?
Is accounts receivable an asset? In financial accounting, assets are resources owned or controlled by individuals, corporations, or governments to create a positive economic benefit. Think of assets as things that can generate cash flow in the future, offset expenses and financial risk, or improve sales.
Assets can take lots of different forms from electronic invoices to patents (intellectual property) and equipment.
If a company needs more liquidity (available cash) to support its operations or make new investments, assets can provide that leeway. In lean times or during an economic downturn, a company with a strong accounts receivable portfolio and practice may leverage these assets to secure a bank loan at a reasonable rate.
How are assets different from liabilities?
Assets differ from liabilities because they put money into your company, while liabilities take it out. This is why it’s crucial to convert assets into cash within a short time period so that companies can pay off their liabilities quicker.
Assets provide your business with a current or future economic benefit. Assets are typically grouped based on how liquid they are, meaning how quickly they may be converted into cash. The most liquid asset is cash because you can use it immediately to pay off debt or liabilities. On the other hand, an illiquid asset takes longer to convert to cash. Examples of illiquid assets include office property, a manufacturing factory, heavy equipment, and vehicles, which take time to sell before they become a deposit in the bank.
Liabilities are what your company owes, i.e., bank debt and mortgage debt. It’s essential to have more assets than liabilities to create a strong financial position. If your company has more liabilities than assets, you risk going bankrupt or going out of business.
How do you determine the value of assets?
Asset valuation involves determining the fair market or present value of assets. You use book values, absolute valuation models like discounted cash flow analysis, option pricing models, or “comparables” to determine this.
To calculate your net asset value (tangible assets), take the book value of tangible assets (historical costs minus accumulated depreciation) on the balance sheet minus intangible assets and liabilities.
Net Asset Value = Book Value minus Intangible Assets and Liabilities
Keep in mind that the market value of an asset will most likely differ from its book value and even shareholder’s equity (based on historical cost). For some companies, their most significant value lies in their intangible assets. Examples include brand recognition, copyrights, goodwill, patents, trademarks and more. These are the opposite of tangible assets, which consist of equipment, inventory, land, and vehicles.
Read our blog → Stress-free accounts receivable solutions for smoother cash flow
Is accounts receivable a cash asset?
Extending credit to customers for goods and services creates accounts receivable on the balance sheet. Therefore, it’s an asset because it will be converted into cash sometime in the future. On the other hand, liabilities are what a company owes, and equity is the difference between the two. The balance sheet formula is assets plus liabilities equals owners’ equity.
A receivable that converts into cash after more than 1 year will be recorded as a long-term asset on the balance sheet and may be classified differently:
- Long-term note receivable: formal promissory note still due after one year
- Long-term receivable or non-current asset: labeled as this if not backed by a promissory note
Unfortunately, a company may never collect all of its accounts receivable. In 2024, 8% of all B2B invoices were bad debt. Under accrual basis accounting, these can be offset by an allowance for doubtful accounts. The allowance estimates the amount of bad debt related to the receivables.
Suppose a customer pays you the $5,000 they owe your business. In that case, you’d have to put the receivable back on your balance sheet by debiting “accounts receivable” for $5,000 and crediting “revenue” for $5,000. To record the cash payment, you would debit “cash” for $5,000 and credit “accounts receivable” for $5,000 to close it out once again.
The best way to ensure you collect your receivables on time (or at least within 60 days) is to automate the collection process. Not only can accounts receivable automation save you time, but it can save you money in the long run. Productivity savings is gained through automated communications with your customers, which can help them to pay you faster. Agentic AI can even draft payment reminder emails intelligently on behalf of collectors. Learn more about Agentic AI for AR.
Agentic Email tools help collectors sort through their inboxes and draft personalized responses to buyers with the help of AI virtual assistants.
Is accounts receivable a current asset?
Accounts receivable are considered a current asset because they usually convert into cash within one year. When a receivable takes longer than one year to convert, it will be recorded as a long-term asset, long-term receivable, or non-current asset.
Current assets are essential to a business because they may be used to support day-to-day operations and pay for operating expenses. They also represent a company’s liquid assets because they convert into cash in a short amount of time.
In addition to accounts receivable, there are other current assets found on the balance sheet. Here are some examples:
- Accounts receivable
- Cash
- Cash equivalents
- Inventory
- Marketable securities
- Office equipment
- Pre-paid liabilities
- Real estate
- Other liquid assets
Companies may use current assets, cash, and cash equivalents (that may be converted to cash) to pay their short-term debt obligations. Cash equivalents can include inventory like raw materials and finished goods that may be sold quickly.
Even though you may be reluctant to sell to your customers on credit, accounts receivable can help your company grow over time. After all, the more receivables you receive, the more valuable your business will be. Plus, assets like receivables can help you to:
- Run a business easier because you may sell and transfer assets or use them to lower your taxes.
- Generate more revenue because assets may be invested and help it to become more profitable throughout the years.
Why accounts receivable is not a liability or equity?
Accounts receivable do not fall under current/long-term liabilities or equity (the difference between assets and liabilities). Why? Because it’s money that is contractually owed to a company and shown on the balance sheet. A company has a risk because customers may reduce payments or not pay at all. This may create uncertainty for a company because it may not cover its daily operating expenses.
It’s easy to mistake AR as a liability because of the risk — customers may make only partial payments or not pay at all. However, finance practices count it as an asset since accounts receivable get converted into cash in the future, usually 30, 60 or 90 days after an invoice is generated or delivered.
Indeed, AR can create uncertainty for a business in cases when receivables do not cover a company’s daily operating expenses. AR can negatively impact a business, too. For instance, liquidity and financial flexibility may suffer and reduce the opportunity to grow or maximize revenue. A company’s executives may consider short-term borrowing, but it’s not ideal. It’s better to have a steady cash flow to cover obligations and expenses.
Automate your accounts receivable
Want to learn more about accounts receivable automation software from Billtrust? Fill out the contact form.
