Accounts receivable revenue can be confusing for small businesses because it’s money that’s owed but hasn’t yet been paid.
When you offer customers or clients goods and services on credit, your accounts receivable keeps track of what’s owed to you and when. A solid accounts receivable process can improve cash flow by making sure you get paid on time according to the payment terms of your contracts with customers.
But how is accounts receivable recorded on your balance sheet? Keep reading to find out more about the definition of accounts receivable as it relates to assets, revenue, liabilities, and equity.
Table of Contents
- Is accounts receivable an asset?
- Is accounts receivable considered revenue?
- What are other assets for small businesses?
- What else is considered revenue for small businesses?
- What is considered a liability for a small business?
- What is considered equity for a small business?
- What do assets, liabilities, and equity look like on a balance sheet?
Accounting Definitions Cheat Sheet
Something your company owns
Your company’s income
Debt your company owes
Leftover assets after liabilities
Is accounts receivable an asset?
Yes, accounts receivable is an asset on your balance sheet. For businesses that use accrual accounting (as opposed to cash basis accounting), accounts receivable is an asset that will soon be converted to cash, usually within 30, 60, or 90 days.
If your accounts receivable takes longer than one fiscal year to convert to cash, it’s considered a long-term asset that may be offset by what’s called “allowance for uncollectible accounts.”
Allowance for uncollectible accounts estimates the amount of bad debt your business will see in any given time period. Bad debt is accounts receivables your business can’t collect from customers, either because they won’t pay you or they’ve gone bankrupt.
The difference between your gross accounts receivable and your anticipated allowance for uncollectible accounts is the accounts receivable asset your business can expect to convert to cash.
Is accounts receivable considered revenue?
Yes, businesses that use accrual accounting record accounts receivable as revenue on their income statement. That’s because accounts receivable is considered revenue as soon as your business has delivered products or services to customers and sent out the invoice.
Businesses need to be diligent about tracking their accounts receivable because it’s considered revenue. If you’re not tracking your accounts receivable with automation, you’re also not tracking cash flow — and that’s where your business can get into trouble.
When you offer customers goods and services on credit, you’re trusting that they’ll deliver on your payment terms — but that’s not always the case. Keep a close eye on your ratio between your accounts receivable and cash on hand, as that will tell you whether or not you can anticipate any cash flow issues.
What are other assets for small businesses?
Business assets are anything your business owns, but that can come in many forms. You’ll want to categorize your assets as “current assets”, “fixed assets”, and “other assets.
Current assets are short-term. They’re the assets you spend on running your business day-to-day, and they’re usually spent within a year.
Fixed assets are long-term. Physical assets like property and equipment are “fixed” because they last a lot longer than one fiscal year; in fact, you probably really depend on them to run your business for the long haul.
Examples of Current Assets
Examples of current assets include:
- Cash on hand
- Accounts receivable
- Equity or debt securities
- Prepaid expenses — goods or services you’ve paid for but have yet to receive in full
Examples of Fixed Assets
Examples of fixed assets include:
- Real estate and land
- Office furniture
Keep in mind there are also intangible assets, which are things like patents, brands, trademarks, or copyrights. Your intangible assets don’t appear on your balance sheet.
What else is considered revenue for a small business?
When you’re using accrual accounting for your small business, you’re tracking revenue with an accounts receivable process. This means you may be tracking multiple revenue streams, for goods or services or both.
Accounts receivable can help you track the following:
Transaction revenue: One-time payments from the sale of goods
Service revenue: One-time payment from the sale of services, such as consulting, writing, design, etc.
Recurring revenue: Ongoing payments from customers from the sale of goods or services. Retainers, subscriptions, and licensing all fall under recurring revenue.
Keeping track of your accounts receivable becomes even more important when you’re dealing with multiple revenue streams. Use accounting software like Quickbooks or Xero with a payments integration like Plooto to automate the process and make sure your cash flow is flowing.
What is considered a liability for a small business?
Your liabilities are your debts. Debts may include accounts payable, mortgages, bank loans, etc. Accounts payable is the amount of money your company owes to suppliers or creditors.
On your balance sheet, accounts payable is listed as a liability because it’s money that will flow out of your business within a certain period of time, depending on your payment terms with creditors and vendors.
Quick tip: Make payments on your accounts payables as close to their due date as possible to better manage cash flow.
Examples of a liability
Here are some examples of what’s considered a liability:
- Accounts payable
- Interest on debt
- Salaries, wages, and benefits you owe to staff
- Debts you owe
- Utility contracts
- Income tax and sales tax
- Legal costs
- Pre-payments for goods and services you haven’t yet provided
What is considered equity for a small- to mid-sized business?
Equity is what’s left over after you’ve subtracted your liabilities from your assets. It’s the net worth of your business.
If you’re a sole proprietor, you’ll list your “owner’s equity” on your balance sheet. If you’re a corporation, a variety of shareholders own your business equity.
Equity is mostly known as stock, but that’s a simplification. There are a few types of stocks:
Preferred stock: People who own preferred stock get paid out before common stock is paid out to common shareholders
Capital: Leftover cash after a founder’s initial investment in the company
Retained earnings: Whatever the owner(s) reinvests in the company’s operations rather than paying out to themselves or shareholders
What do assets, liabilities, and equity Look Like on a Balance Sheet?
So what does all this look like on a balance sheet?
A balance sheet is made up of the following sections:
Cash and cash equivalents: Cash on hand and investments
Current assets: Your accounts receivable
Property, plant and equipment: Equipment and tangible assets
Intangible assets: Intellectual property, copyrights, etc.
Other assets: Other long-term assets
Current liabilities: Accounts payable and sales tax
Long-term liabilities: Debts beyond one year
The difference between your assets and liabilities
Retained earnings: Your net income, minus any payments to shareholders
Key takeaways for small businesses
- An accounts receivable process improves cash flow by making sure you get paid on time.
- On your balance sheet, accounts receivable is recorded as an asset.
- Businesses that use accrual accounting record accounts receivable as revenue on their income statement.
- If your accounts receivable takes longer than one fiscal year to convert to cash, it’s a long-term asset that’s offset by an “allowance for uncollectible accounts.”
- Accounts payable and debts are liabilities on your balance sheet because it’s money your company owes to others.
- Equity is what’s left over after you’ve subtracted your liabilities from your assets. It’s the net worth of your business.
01 Accounts Receivables and Assets Explained