Companies record accounts receivable as assets on their balance sheets because the customer has a legal obligation to pay the debt and the company has a reasonable expectation of collecting it. They are considered liquid assets because they can be used as collateral to secure a loan to help the company meet its short - term obligations. Receivables are part of a company's working capital. 2
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Furthermore, accounts receivable are classified as current assets, because the account balance is expected from the debtor in one year or less. Other current assets on a company's books might include cash and cash equivalents, inventory, and readily marketable securities.
Assets that could not easily be converted into cash within a year are recorded as noncurrent assets. That category often includes things like physical property, long - term investments, and intellectual property, such as trademarks.
Accounts Receivable vs. Accounts Payable
When a company owes debts to its suppliers or other parties, those are accounts payable. Accounts payable are the opposite of accounts receivable. To illustrate, Company A cleans Company B's carpets and sends a bill for the services.
Company B now owes Company A money, so it lists the invoice in its accounts payable column. While Company A waits to receive the money, it records the amount in its accounts receivable column.
