What Is an Accounts Receivable Liability?

Esther Ejim
Esther Ejim
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Woman posing

For the purposes of accounting, accounts receivable refers to the outstanding sums of money that are yet to be paid to a business by clients for services that may have been rendered to them by the company, or for goods or products that may have exchanged hands between the two parties on credit. In the usual sense of the term, such accounts are labeled as assets by the company to which the money is owed based on the fact that the sale has been concluded, the company has done its part, and the only action left is for the client to pay. This is where the problem often surfaces leading to a situation in which the supposed asset turns into a liability for the company expecting the payment. As such, an accounts receivable liability occurs when the accounts receivable switches from an asset to a liability for the company expecting a payment.

Most times, businesses perform services or sell goods to their clients without immediate payment, rather based on the promise of the buyer to pay at a stated date and according to an established payment plan. In such an instance, this money that the company is expecting will be listed as an asset in the balance sheet since it is an expected income. This same asset, however, can become an accounts receivable liability when the client does not pay up, fails to pay up according to plan, or declares bankruptcy. The reason why the accounts receivable liability is so named is as a result of the fact that any default on the part of the client or customer could put a strain on the finances of the company and the way it is running its operations. Even when the client is repaying the money in a manner that will lead to a loss for the company, or a radical reduction in the previously forecasted profit margin, such an account becomes an accounts receivable liability.

Part of the reason why the money could be labeled as an accounts receivable liability when it is repaid in an inconsistent manner could be due to the expenses incurred by the business in trying to obtain its money from the client. Some of these expenses include the allocation of resources to track the customer down and constantly remind or follow up with him or her, or it could arise from the assignment of the overdue account to a collection agency. Businesses tend not to stress the financial aspect too strongly in their bid to maintain a cordial relationship with their clients, especially where they perform services, leading to some defaults on the part of the clients.

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