General Education Development (GED) Practice Exam

What type of assets are accounts receivable classified as?

1. Fixed assets

2. Fixed liabilities

3. Current assets

4. Current liabilities

The correct answer is: Current assets

Accounts receivable are classified as current assets because they represent money that is owed to a business by its customers for goods or services that have been delivered or used but not yet paid for. These amounts are expected to be converted into cash within a year or during the normal operating cycle of the business, making them short-term financial assets. Current assets are crucial for managing a company's day-to-day operations, as they provide liquidity necessary to cover immediate obligations. This classification stands in contrast to fixed assets, which are long-term investments in tangible or intangible items that a company uses in its operations, such as buildings or equipment. Similarly, fixed liabilities pertain to long-term debts, while current liabilities consist of obligations that are due within one year, such as accounts payable or short-term loans. Therefore, accounts receivable's expectation of being collected within a short period aligns perfectly with the definition of current assets.