Why are accounts receivables considered an asset?
When a law firm provides services and issues an invoice for those services, the law firm is essentially extending credit to the client. Your firm’s accounts receivable (A/R) tracks the amount each client owes for services rendered in the past, e.g. the amount of credit your firm has extended to each client. (Attorneys can avoid having to extend credit to clients by using evergreen retainers or requiring advanced fee deposits from clients. Also, be aware that you do not track a contingent fee as A/R, and you only track flat fees A/R in certain circumstances.) Basically, your A/R tracks each of your client’s obligations to pay the firm at a future date.
The term assets refers to a law firm’s resources, and includes cash and other items that can be converted to cash at a future date. Because A/R is converted to cash in the future when a client pays the amounts due on an invoice, A/R is considered to be an asset. Since most firms require clients to pay for the services rendered within 30-60 days of the invoice date, they typically list A/R as a current asset on the balance sheet.
1. Accounts Receivable an Asset or Revenue
2. Accounting Equation
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