Accounts Receivable: The Grey Area Between Asset and Revenue

Accounts receivable is a concept that often causes confusion. It can be difficult to determine if it should be classified as an asset or revenue for accounting purposes. Accounts receivable, or AR, is the money owed to a business by its customers for goods or services provided on credit. In this blog post, we will explore the grey area between accounts receivable as an asset or revenue.

Accounts Receivable as an Asset

Accounts receivable is an asset of a business, typically listed under the current assets on the balance sheet. Accounts receivable represent money owed to a business by customers for goods or services that have been delivered or used but not yet paid for. A company’s accounts receivable turnover ratio is used to measure the number of times its accounts receivable are collected during a specified period of time. A high accounts receivable turnover ratio indicates a good collection process, while a low accounts receivable turnover ratio indicates that the company is having trouble collecting money owed to it. Accounts receivable should be managed carefully and monitored closely so that any delays in payment can be identified quickly and addressed in a timely manner.

Accounts Receivable as Revenue

Accounts receivable are considered to be revenue when they are collected. When customers pay their bills, the money is recorded as revenue on the company’s income statement. This type of revenue is usually calculated as part of the accounts receivable turnover ratio, which measures how quickly the company is collecting payments from its customers. 

The accounts receivable turnover ratio is an important indicator of a company’s financial health, since it shows the rate at which it is turning its sales into cash. A high turnover ratio suggests that the company is collecting payments from customers in a timely manner, while a low ratio could indicate that there are delays in collecting payments or that customers are not paying their bills. 

It is important for companies to maintain a healthy accounts receivable turnover ratio, as it can affect their ability to finance operations and invest in new opportunities. Additionally, customers who are slow to pay their bills can disrupt cash flow, which can prevent a business from meeting its obligations. Companies should strive to have an efficient accounts receivable system in place to ensure that their customers are paying on time and their cash flow remains healthy.

How to Improve Accounts Receivable

One of the most important metrics to track when it comes to accounts receivable is the accounts receivable turnover ratio. This ratio is an important measure of a company’s ability to collect its outstanding customer balances in a timely manner. A higher accounts receivable turnover ratio means that the company is more efficient at collecting its receivables, while a lower accounts receivable turnover ratio could be an indication of trouble.

If a company has a low accounts receivable turnover ratio, there are some steps they can take to improve their collection process and increase the ratio. Here are some tips:

1. Establish and enforce payment terms: Setting and sticking to payment terms is key to getting customers to pay on time. Ensure that payment terms are stated clearly in all contracts and invoices, and make sure that customers understand them and agree to them before any goods or services are delivered.

2. Regularly follow up with customers: Don’t wait until customers are overdue on their payments before reaching out. Make sure to send out reminder emails and make phone calls as soon as an invoice becomes due, and continue to follow up until the balance is paid.

3. Offer incentives for early payment: Incentivizing customers to pay early is a great way to get them to pay their bills on time. Consider offering discounts for customers who pay within a certain timeframe or offering other special deals for early payment.

4. Use automated invoicing software: Automated invoicing software can help streamline the billing process and ensure that invoices are sent out quickly and accurately. This will ensure that customers receive their bills in a timely manner and don’t miss out on payment deadlines.

By implementing these strategies, companies can improve their accounts receivable turnover and get their money faster. This will help improve their cash flow, resulting in greater financial stability and better business performance overall.