Are accounts receivable an asset to a business?

US-PDGov

By Adella Fitzroy

Ask any accountant where accounts receivable are held in the financial realm and they will tell you that they are assets, something that benefits a company's financial health. Unfortunately, what some people would consider a benefit might end up being so. The trouble with accounts receivable is that they are a promise to pay for goods or services that have been sold to a customer. So what happens to accounts receivable that are not paid by the customer?

In many cases, accounts receivable can be beneficial to the company who carries them. They are, after all, a promise to pay for goods and services received. In some cases, however, that's as far as they go. Financial failure, malicious intent, and other factors result in debtors to a company failing to make good on their accounts. On the positive side, a company that carries a reasonable amount in accounts receivable can value itself higher using these accounts as an asset on their books.

The usual course of action, after collection efforts fail, is to write a bad account receivable off as a bad debt. Other times, another company might buy a company's accounts receivable as a benefit to them, in which case the selling company is relieved of the burden of the money that is owed.

Some creditor companies turn accounts receivable over to a collection agency or similar company in order to collect payment. Sometimes this is successful, but short of success this course of action often results in more debts that is incurred by the company holding the accounts receivable. Still other firms choose to take their debtors to court, which again can result in a settlement of the amount owed, but can also result in more costs, or even the bankruptcy filing of the debtor, in which case the money is often never recovered.

Another problem that presents itself when a debtor fails to make good on their account is that the company that is carrying the account receivable continues to spend time and money on maintaining the account despite not receiving the benefit of the money that is owed.

Perhaps one of the biggest problems with the failure to collect on an account receiving is that even though work was performed or goods were delivered, and money was not received to compensate for the time and materials rendered, that time and those materials used in the engagement of the goods sold were still paid for by the creditor company, which again fails to receive benefit and goes into arrears for the product and/or labor involved.

The solution used by many companies is to not offer credit. For this reason certain sales might not be made, and either client companies will either wait until they can purchase with cash or they might even go to a company that will accept their credit. The chance of this happening is up to the potential creditor. Only time and a history of results will determine the best policy for the credit company in the long run.

About the author: Adella Fitzroy is a small-business owner who received funding and financial advice from EBF Group Ltd. She found that the advice she accumulated and received from the company was important in helping her review the progress and profit of her company.