State BPA Fundamental Accounting Practice Exam

What type of account is Accounts Receivable classified as?

1. Asset

2. Liability

3. Equity

4. Revenue

The correct answer is: Asset

Accounts Receivable is classified as an asset because it represents money owed to a business by its customers for goods or services that have been delivered or used but not yet paid for. This classification is part of the company's balance sheet and signifies a future economic benefit, as the company expects to receive cash in the future when these debts are settled. The asset classification is significant as it suggests that the receivable has value and will contribute to the organization’s resources. In accounting, assets are divided into current and non-current, and accounts receivable is typically considered a current asset since it is expected to be converted into cash within a year. Understanding this classification helps in assessing a company's liquidity and financial health, as it informs stakeholders about the expected inflow of cash. Other classifications, like liabilities, represent obligations the company must pay, equity pertains to the ownership value in the company, and revenue refers to the income earned through sales. None of these pertain to the nature of accounts receivable, which inherently involves the expectation of future cash inflow, thereby solidifying its status as an asset.