Accounting Basics: Current Assets - Accounts Receivable

Almost as common a term as cash nowadays, accounts receivable is an accounting term meaning amounts owed to a business by other business or customers (individuals or otherwise). An accounts receivable arises anytime when goods are sold but cash is not received immediately; thus when you purchase something for cash at Walmart you are not creating an accounts receivable. If you commit to purchase something (say a lawnmower) and you are offered the option to pay next month, now you have created an accounts receivable on the retailers books.

Unlike a note receivable (to be discussed next), there is generally no signed agreement beyond an invoice for an accounts receivable. They are generally short term in nature (less than a year, if not only a couple months). Because of their short term nature, they are generally listed as a current asset on the balance sheet next after cash.

Accounting Basics: Current Assets - Cash

Cash is normally the first item listed under Current Assets on the Balance Sheet. What does cash include? Cash includes any deposits available in the bank as well as anything on-hand which might include bills and checks or money orders to be deposited.

Accounting Basics: Current Assets

We've previously discussed what Assets are. In an unclassified balance sheet where you only have 3 major classifiations (assets, liabilities and owners equity) that would be in the story. A much more useful report is the Classified Balance Sheet. Here, the three major categories are subdivided to provide readers of the financial statements with much more detailed information. The first such subdivision under assets is Current Assets.

Current Assets are defined as those assets which will either be converted into cash or otherwise 'used up' by the business in a relatively short period of time (generally one year or less). On the balance sheet, they are generally presented in order of liquidity; thus cash is generally listed first.

Other examples of current assets include accounts receivable, notes receivable (which often have a current and a non-current portion) and prepaid expenses. These will be examined in future entries.

Accounting Basics: Assets

As hinted in my previous entry, the balance sheet is comprised of three basic sections: assets, liabilities and owners equity. Assets are resources or items of value owned by the business. They are items of value which can be used or exchanged in the production or delivery of services of the business.

Typically, the most common asset people think of is cash. Cash can be exchanged to purchase office supplies, raw materials used in production, pay employees, etc.; thus it is an asset of the business. Machinery is another asset; it is used in the production of the goods or services delivered by the business.

Substantial effort is made by accountants in valuing assets; some of which may not have a clear current value. For example, a piece of equipment purchased five years ago for $100,000 and used daily in the operation of the business is not worth $100,000 today (in the same way that a five year old car is not worth the price paid for it when it was new). In this instance, accountants use depreciation to adjust the value of a 'fixed asset' such as this (to be discussed later).