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Understand contract asset vs receivable, the key differences, and why proper classification matters for accurate financial reporting and cash flow management.
On your balance sheet, the difference between a contract asset and an account receivable is more than just accounting jargon—it’s a critical piece of your financial story. One tells you how much earned revenue is tied to future work, while the other is simply cash waiting to be collected. Getting the contract asset vs receivable distinction right is vital for accurate cash flow forecasting and risk management. It's also a non-negotiable part of ASC 606 and IFRS 15 compliance. This guide will help you understand the key difference, including the concept of an unconditional right to consideration, so you can manage your financials with confidence.
If you’ve ever felt a little fuzzy on the difference between a contract asset and an account receivable, you’re not alone. While they sound similar, they represent two distinct stages in your revenue cycle. Understanding this distinction is crucial for accurate financial reporting, especially under modern revenue recognition standards. Getting it right ensures your balance sheet truly reflects your company’s financial position.
Let’s break down what each term means and why the difference matters.
Think of a contract asset as a placeholder for revenue you’ve earned but can’t yet bill for. It’s your right to payment for goods or services you’ve delivered, but that right is conditional on something else happening first. You have to complete another task or hit a milestone before you can send the bill. Under standards like ASC 606, recognizing this conditional right is key. For example, if a project requires two phases for payment, the value of the first completed phase is a contract asset until you finish the second.
An account receivable, on the other hand, is much more straightforward. This is an unconditional right to receive payment from a customer. You’ve fulfilled all your obligations under the contract, and the only thing standing between you and the cash is the passage of time. Once you’ve sent the invoice, you have a legally enforceable claim to that money. Continuing our example, once you complete both project phases and send the final invoice, the contract asset becomes an account receivable. Now, you’re simply waiting for the customer to pay according to the agreed-upon terms.
The core difference comes down to one question: Is your right to get paid conditional or unconditional? If you still have work to do before you can bill, you have a contract asset. If you’ve done everything required and are just waiting for the payment due date, you have an account receivable. A common mistake is booking all earned revenue as an account receivable immediately, which can misrepresent your financials and cause audit issues. Properly distinguishing between these two items is a cornerstone of accurate revenue recognition and a clear sign of a well-managed finance function.
Here’s where things can get a bit tricky. The term “unbilled receivable” sounds a lot like a contract asset, but they aren’t the same. An unbilled receivable is revenue you’ve earned and have an unconditional right to, you just haven’t sent the invoice yet. The only thing required is the passage of time. For example, if you provide a monthly service, you have an unbilled receivable at the end of the month before you generate the bill. A contract asset, however, is conditional. Your right to payment hinges on completing a future task or meeting a specific milestone. Getting this classification right is essential for accurate financial statements and avoiding compliance headaches down the road.
Separating these assets isn't just an accounting exercise; it’s a strategic move. Each carries a different level of risk. An account receivable primarily has credit risk—the chance the customer won’t pay. A contract asset, however, carries both credit risk and performance risk. Performance risk is the possibility that your company won't be able to fulfill the remaining conditions required to convert that asset into a receivable. This dual risk profile means contract assets are inherently less certain. By distinguishing between them, you give investors and stakeholders a much clearer picture of the risks in your revenue pipeline and the true predictability of your cash flow.
On the flip side of contract assets, you have contract liabilities. This represents your obligation to a customer for goods or services they've paid for but you haven't delivered yet. You’re likely familiar with the concept under other names, like deferred revenue or unearned revenue. A classic example is an annual software subscription paid upfront. While you have the cash in the bank, you also have a year-long obligation to provide the service. As you deliver that service each month, you recognize a portion of the liability as earned revenue. Properly tracking this is essential for ASC 606 compliance, as it gives a clear picture of your future obligations and prevents you from overstating your current performance.
Understanding when to recognize a contract asset versus an account receivable is a common hurdle for finance teams, but it doesn't have to be complicated. A contract asset comes into play when you've done some of the work for a customer and earned the revenue, but you don't yet have an unconditional right to bill them for it. Think of it as a placeholder on your balance sheet that says, "We've earned this money, but we have to complete another step before we can send the invoice."
This concept is a cornerstone of modern revenue recognition standards like ASC 606. It ensures your financial statements accurately reflect the value you've delivered, even when your billing cycles don't perfectly align with your work. The key distinction lies in whether your right to payment is conditional or unconditional. If it depends on anything other than the simple passage of time—like finishing another part of the project or hitting a specific milestone—you're looking at a contract asset. Getting this right is essential for accurate financial reporting and gives you a clearer picture of your company's performance.
Before you even record a contract asset, there’s a critical first step: determining if you’re likely to get paid. Under ASC 606, you must assess whether it's probable that you'll collect payment from the customer. This isn't just about managing bad debt later on; it's a foundational part of revenue recognition that dictates whether a valid contract exists for accounting purposes. Think of it as a gatekeeper for your balance sheet. This upfront evaluation of credit risk helps you avoid recognizing revenue from customers who are unlikely to pay, ensuring your financials reflect economic reality. If collection isn't probable, you generally can't recognize revenue or a contract asset until the cash is in hand.
At the heart of every contract asset is the idea of a performance obligation. This is simply the promise you've made to a customer to provide a good or service. A contract asset appears on your books when you've fulfilled part of your promise but haven't completed everything required to issue an invoice. You've delivered value and recognized the revenue for that portion of the work, but your right to get paid is still tied to future events.
For example, you might complete the first phase of a two-part project. You've technically earned revenue for that first phase, but the contract might state you can only bill the client once the entire project is finished. That earned-but-not-yet-billable revenue is your contract asset. It’s a formal acknowledgment of the work you’ve done and the economic value you’ve created.
The defining feature of a contract asset is that your right to payment is conditional. This means something else needs to happen before you can legally demand payment from your customer. It’s not just a matter of waiting 30 days for an invoice to be due; there's a specific contractual hurdle you still need to clear. This condition could be anything from delivering the final component of a product to meeting a specific project milestone.
This is the main difference between a contract asset and an accounts receivable. With an accounts receivable, your right to payment is unconditional—the only thing standing between you and the cash is the passage of time based on your payment terms. But with a contract asset, time alone won't turn it into cash. You must first satisfy the remaining conditions outlined in your agreement with the customer.
So, how do you know when to put a contract asset on your books? The process is straightforward. After you complete a portion of the work for a customer, you need to look at your contract and ask one simple question: Is my right to payment unconditional? If the answer is yes, you have an account receivable. If the answer is no, because you still have other obligations to fulfill, you have a contract asset.
You recognize a contract asset at the moment you've earned revenue but haven't yet met all the contractual requirements to bill for it. This is a critical step for maintaining ASC 606 compliance and ensuring your financial reporting is accurate. By correctly identifying and recording contract assets, you provide a true and fair view of the revenue you've generated and the assets your company holds.
Let's make this real with a couple of examples. Imagine a construction company is hired to build a new office building. The contract is structured around three major milestones. After the company completes the foundation (milestone one), it has earned revenue for that work. However, the contract states they can only send an invoice after completing the entire framework (milestone two). The value of the completed foundation work is recorded as a contract asset until the framework is finished.
Here’s another one from the tech world: A software company signs a client for a 12-month service agreement but only bills them once per year. Each month, as the company provides its service, it earns one-twelfth of the annual fee. For the first 11 months, that earned revenue is recorded as a contract asset because the condition for billing—the passage of a full year—hasn't been met yet.
Contract assets aren't just an obscure accounting term; they're a regular feature on the balance sheets of many major industries. You'll frequently find them in sectors with complex or long-term contracts, like software and SaaS, construction, and professional services. In these fields, it's common for work to be delivered in stages or over extended periods, while billing happens on a different schedule. For instance, a construction company might complete a project's foundation but can only invoice after the entire framework is up. Similarly, a SaaS company provides service daily but bills annually. In each case, the business has earned revenue before it has an unconditional right to payment, creating the need for a contract asset to accurately reflect its financial position and maintain proper revenue recognition.
Now, let's switch gears to a term you’re likely more familiar with: accounts receivable (AR). While it might seem straightforward, understanding its specific definition under ASC 606 is key to distinguishing it from a contract asset. Unlike a contract asset, which is tied to future performance, an account receivable represents a clear, unconditional right to payment. The hard part is over; now, it’s just a matter of waiting for the cash to come in. This distinction is crucial for accurate financial reporting and maintaining a healthy cash flow.
The defining feature of an account receivable is that your right to payment is unconditional. This means the only thing standing between you and the customer’s payment is the passage of time. You’ve fulfilled your end of the bargain completely, and there are no other performance obligations left to meet. Think of it as a one-way street: the customer owes you money, and the due date on the invoice is the only remaining variable. This unconditional nature is what separates it from a contract asset, where your right to payment still depends on completing another task.
Billing is the event that typically signals the creation of an account receivable. Once you’ve delivered a service or product and sent an invoice with clear payment terms (like Net 30), you’ve established an unconditional right to that cash. For example, if you complete a consulting project and invoice your client for the full amount, that invoiced amount immediately becomes an account receivable. The client doesn’t need you to do anything else; they simply need to pay you within the agreed-upon timeframe. This clear-cut process is a cornerstone of managing your company's working capital effectively.
You should recognize an account receivable on your balance sheet the moment your right to payment becomes unconditional. This is typically when you’ve satisfied all performance obligations for that portion of the contract and have issued an invoice. For compliance with accounting standards like ASC 606, it’s essential to present accounts receivable separately from any contract assets. This separation provides a clearer picture of your company’s financial health, showing what you’re owed outright versus what you expect to earn after completing more work. Getting this classification right is fundamental for accurate revenue recognition.
To put it simply, an account receivable has a few key characteristics. It represents money owed to you by a customer for goods or services that have already been fully delivered. You have billed the customer for this amount, and your right to collect the payment is guaranteed and not dependent on any future actions from your team. The payment is expected within a typical billing cycle, and the only condition left to be met is the passage of time until the invoice due date arrives.
The switch from a contract asset to an account receivable isn't just an accounting formality; it’s a critical moment in your revenue lifecycle. This transition signifies that your right to payment has solidified, moving from a conditional promise to a straightforward obligation from your customer. Understanding this process is key to keeping your financial statements accurate and your cash flow predictable. It all comes down to meeting your contractual obligations and clearing the path to issue an invoice.
Think of the conversion from a contract asset to an account receivable as a light-switch moment. A contract asset exists when your right to payment is conditional on something other than the passage of time—like completing another phase of a project. The moment that condition is met, the switch flips. The asset is reclassified as an account receivable because your right to payment is now unconditional. All you have to do is wait for the payment due date to arrive. This reclassification is a core principle of ASC 606, ensuring revenue is recognized in line with performance.
So, what flips the switch? Usually, it’s a specific billing milestone defined in your customer contract. A contract asset represents the work you've done that you can't yet invoice for. For example, you might have completed the first of three software development sprints, but the contract states you can only bill after all three are finished. Once that final sprint is complete, you’ve hit the milestone. Your conditional right to payment becomes unconditional, and the contract asset converts to an account receivable. Tracking these milestones accurately is crucial, which is why many businesses rely on automated solutions that sync with their project management tools.
To support the reclassification from a contract asset to an account receivable, you need a clear paper trail. This isn’t just for your internal records; it’s essential for passing audits. Your documentation should prove that the conditions for payment have been fully met. This could include project completion sign-offs from the client, delivery confirmations, or internal reports verifying that a service milestone has been achieved. You should be able to provide a detailed explanation of the goods or services transferred and clearly show when and why the right to payment became unconditional. Keeping these records organized is a cornerstone of strong internal controls.
When a contract asset becomes an account receivable, the change happens entirely on the asset side of your balance sheet. One current asset (contract asset) simply gets reclassified as another current asset (account receivable). It’s important to remember that this conversion does not impact your income statement. The revenue was already recognized when you initially recorded the contract asset. This shift is about clarifying the nature of your assets. It shows investors and stakeholders that a conditional right has matured into a direct claim to cash, which provides a clearer picture of your company’s short-term liquidity and financial health. You can find more articles on financial reporting on our blog.
Understanding the difference between a contract asset and an account receivable is more than just an accounting exercise—it directly impacts your financial reporting, cash flow, and overall business strategy. Getting this right means you can present a clear picture of your company's health, stay compliant, and make smarter decisions. Let's break down what you need to manage.
When you prepare your balance sheet, you can’t just group contract assets and accounts receivable together. They need to be listed as separate line items. Why? Because they represent different levels of risk and certainty. An account receivable is an unconditional right to cash, while a contract asset is still conditional. Separating them gives investors, lenders, and other stakeholders a more transparent view of your financial position. This distinction is a key requirement for clear and compliant financial reporting, ensuring everyone understands exactly when and how you expect to get paid.
Beyond just separating contract assets from receivables, you also need to classify them as either current or noncurrent. The rule of thumb is simple: if you expect the contract asset to be converted into cash within one year, it’s a current asset. If it will take longer than a year, it’s noncurrent. This classification is crucial because it directly impacts how stakeholders assess your company's liquidity and short-term financial health. A balance sheet with a large amount of current contract assets suggests cash is on the horizon, while a high value in noncurrent assets indicates that revenue is tied up in longer-term projects. Getting this right provides a much clearer picture of your company's operational cycle and financial stability.
Contract assets are a direct result of the five-step revenue recognition model outlined in ASC 606. Specifically, they pop up in step five. A contract asset is created when you've fulfilled a performance obligation (i.e., you’ve delivered the goods or services) but can't yet invoice the customer because a future condition must be met. For example, maybe you need to complete another project phase before you can bill for the first one. Recognizing revenue at this stage is correct under ASC 606, but since you don't have an unconditional right to payment, you record a contract asset, not an account receivable.
Because contract assets are conditional, they carry a bit more risk than accounts receivable. Their conversion to cash isn't guaranteed and might take longer, which can affect your cash flow forecasting. You also have to consider the potential for non-payment. Under current accounting standards, you must assess your contract assets for expected credit losses. This means you need a process to evaluate the risk that a customer won't be able to pay once the conditions are met. This assessment can impact your financial statements and requires careful monitoring.
Effectively managing your working capital means keeping a close eye on your contract assets. A key practice is to regularly assess them for impairment, which is the accounting term for a potential loss in value. You need to determine if a customer is unlikely to pay the full amount. It’s also important to distinguish between a credit loss (the customer can't pay) and an implicit price concession (you effectively agreed to a lower price). Having a clear system to track and analyze these assets is crucial. Automating this process with the right integrations can help you maintain accurate records and make proactive adjustments to your financial strategy.
It’s a tough reality of business, but not every dollar you earn will make it to your bank account. Both contract assets and accounts receivable come with the risk that a customer might not pay. That’s why accounting standards require you to look ahead and account for these potential losses before they happen, a process known as impairment. This isn’t about being pessimistic; it’s about being realistic and ensuring your financial statements reflect what you truly expect to collect. Properly accounting for impairment is a critical part of maintaining a healthy balance sheet and providing a transparent view of your company’s financial position.
To standardize how companies account for these potential losses, accounting rules provide a framework called the Current Expected Credit Loss (CECL) model. This model requires you to estimate and record expected losses over the entire life of an asset, from the moment it’s created. This applies to both accounts receivable and contract assets. In fact, contract assets often carry a higher risk profile. Because their collection depends on future events or performance, they can take longer to convert to cash, increasing the window for potential credit issues to arise. Applying the CECL model helps ensure you’re not overstating the value of your assets.
So, how do you actually estimate these future losses? One of the most common tools is a provision matrix. This method involves grouping your receivables or contract assets based on shared risk characteristics, like how many days they are past due. You then apply a historical loss rate to each group to calculate an overall expected loss. For example, you might find that invoices 1-30 days past due have a 1% loss rate, while those over 90 days have a 10% loss rate. Even if you feel confident you’ll collect most of what you’re owed, the CECL model requires you to perform this calculation to formally estimate potential losses.
Applying the CECL model can be a heavy lift, especially for private companies that may not have the extensive historical data or resources of larger public firms. Estimating credit losses over the entire life of an asset requires a significant amount of data collection and analysis. This is where having a robust system becomes invaluable. Solutions that integrate your disparate data sources can automate much of this process, making it easier to comply with complex accounting standards without draining your team’s resources. This allows you to focus on strategic decisions rather than getting bogged down in manual data wrangling.
It’s important to distinguish between a true credit loss and what’s known as an "implicit price concession." A credit loss happens when a customer is unable to pay what they owe. An implicit price concession, however, is when you extend credit knowing from the start that you’ll likely collect an amount less than the official price. For example, a hospital might have a standard charge of $10,000 for a procedure but know it will only collect $1,000 from an uninsured patient. That $9,000 difference isn’t a credit loss; it’s a concession that should be factored into the transaction price when you initially recognize revenue.
Here’s a detail that’s easy to overlook: sales tax. How you handle it can impact your credit loss calculation. In some jurisdictions, you are required to remit sales tax to the government even if your customer never pays you. In this scenario, you are exposed to a credit loss not just on the revenue you earned, but also on the sales tax amount you have to pay out of pocket. This means the sales tax portion of the invoice should be included in your CECL calculation, as it represents a real potential cash loss for your business if the customer defaults on their payment.
Getting a handle on contract assets and accounts receivable isn't just about keeping your books tidy—it's about staying compliant and protecting your business. When you correctly classify these items, you create a clear financial picture that stands up to scrutiny. This builds trust with investors, stakeholders, and auditors, all while giving you the accurate data you need to make smart decisions. Let's walk through what you need to know to keep your financial reporting accurate and reduce risk.
If your business operates in the U.S., you need to follow the revenue recognition guidelines set by ASC 606. This standard introduced the term "contract asset" to clarify how you should account for revenue when your right to payment depends on something other than the passage of time. Essentially, if you've completed work but can't send an invoice just yet, you likely have a contract asset. Properly identifying and recording these assets is a core requirement for ASC 606 compliance, ensuring your financial statements accurately reflect your performance under customer contracts.
For businesses operating internationally, the equivalent standard is IFRS 15. Much like ASC 606, IFRS 15 provides a framework for recognizing revenue and requires the proper handling of contract assets. The principles are very similar, focusing on the transfer of control of goods or services to a customer. Whether you're reporting under U.S. GAAP or IFRS, understanding the distinction between a conditional right to payment (a contract asset) and an unconditional one (an account receivable) is essential. Following these global accounting standards ensures consistency and comparability in your financial reporting, which is crucial for global operations.
Your balance sheet shows the numbers, but the financial notes tell the story behind them. When it comes to contract assets, transparency is everything. Under ASC 606, you're required to provide detailed explanations in your financial notes. This isn't just a suggestion; it's a core part of compliance. You need to clearly describe what your contract assets represent, show how their balance has changed during the reporting period, and explain when you expect them to convert into accounts receivable. This level of detail gives investors and auditors a clear understanding of your revenue cycle and the risks involved. Getting these disclosures right is a critical step in maintaining accurate and trustworthy financial reporting and proves you have a solid grasp on your company's performance.
When auditors come knocking, they’ll look closely at your revenue recognition processes. They will pay special attention to your judgments and estimates, especially around contract assets. Auditors want to see that you have a consistent, well-documented method for determining when a performance obligation is met and when a right to payment becomes unconditional. Having messy or unclear records can lead to difficult questions and potential adjustments. A smooth audit depends on your ability to provide a clear trail that justifies how and when you recognized revenue and classified your assets.
Strong internal controls are your best defense against compliance issues and financial misstatements. Start by establishing clear procedures for your team to follow when reviewing contracts and classifying assets. This includes separating duties, performing regular reconciliations, and maintaining detailed records of all contracts and modifications. Using technology can make this much easier. When your systems are connected, you create a single source of truth that reduces manual errors and provides clear visibility. Having seamless integrations between your CRM, ERP, and accounting software helps automate these controls and keeps your data accurate.
Understanding the distinction between a contract asset and an account receivable goes far beyond just keeping your books clean. It’s about gaining a clearer, more strategic view of your business's financial health. When you can confidently classify what you’re owed and when, you can make smarter decisions about your company’s future. This clarity affects everything from how you measure success to how you manage risk and plan for growth. Let's look at how you can use this knowledge to your advantage.
Contract assets give you a more honest look at your company’s performance by letting you report earnings based on the work you’ve actually completed, not just when the cash comes in. This is a game-changer for businesses with long-term projects or subscription models. Instead of seeing financial reports that swing wildly based on payment dates, you get a steady, realistic picture of the value you’re delivering over time. This accurate reflection of performance helps you and your stakeholders understand the true health of the business, making it easier to follow complex revenue recognition rules and report with confidence.
When you have a clear view of your contract assets and a timeline for when they will convert to accounts receivable, you can forecast future cash flow with much greater precision. This isn't just a nice-to-have; it’s essential for smart resource planning. Knowing what money is coming down the pipeline—and what conditions need to be met to secure it—helps you decide when to hire new team members, invest in equipment, or purchase inventory. By connecting your financial data across different platforms, you can create a single source of truth that turns reactive financial management into a proactive growth strategy. Having the right system integrations is key to achieving this level of visibility.
Both contract assets and accounts receivable come with risks, but they aren’t the same. Accounts receivable primarily carry credit risk—the chance that a customer simply won’t pay their invoice. Contract assets, however, are exposed to both credit risk and performance risk. Performance risk is the possibility that you won’t be able to fulfill your end of the bargain, which would prevent the asset from ever becoming an unconditional right to payment. Separating these two asset types allows you to manage each risk appropriately. You can implement stronger project controls to mitigate performance risk while using credit checks and clear payment terms to handle credit risk. This is a core part of maintaining ASC 606 compliance.
Ultimately, clear and accurate financial data empowers you to make better strategic decisions. For instance, your team needs to use good judgment to distinguish between an implicit price concession (where the actual price was lower from the start) and a credit loss (where the customer can't pay the agreed-upon price). These scenarios have different impacts on your financials. When your assets are correctly classified, you can trust your reports to guide critical choices about pricing models, contract negotiations, and customer relationships. Getting this level of clarity often starts with a solid data foundation, which is where a data consultation can help map out a path forward.
For finance leaders, the real challenge isn't just knowing the definitions—it's applying them consistently across thousands of transactions. The main hurdles are pinpointing the exact moment a conditional right becomes unconditional and keeping the clear paper trail needed to satisfy auditors. This is where manual spreadsheets and processes often fall short, creating compliance risks and unreliable forecasts. It's also crucial to separate these assets to manage their unique risks—performance risk for contract assets and credit risk for accounts receivable. Without a solid system, it's easy to misclassify assets, which can distort your financial picture and lead to poor strategic decisions. This is why many high-volume businesses use automated revenue recognition to maintain ASC 606 compliance and a clear audit trail.
Managing contract assets and accounts receivable effectively comes down to having solid processes in place. When your team has clear guidelines and the right tools, you can handle these assets with confidence, ensuring your financial statements are always accurate and audit-ready. It’s about moving beyond just recording transactions and building a system that supports strategic financial management. By implementing a few key practices, you can create clarity, reduce risk, and empower your team to make smarter decisions. This isn't just about compliance; it's about creating a financial engine that runs smoothly and provides real-time insights into your business performance. Strong internal processes prevent revenue leakage, speed up your financial close, and give you a clear view of your cash flow. Here are the core habits that will make a real difference in your financial operations.
The first step is making sure everyone on your team can clearly distinguish between a contract asset and an account receivable. A contract asset is your right to payment for work you’ve done, but that right is still conditional on something else happening—like hitting a project milestone. In contrast, an account receivable is an unconditional right to payment, where only the passing of time is required before it's due. Getting this classification right is the foundation of accurate reporting. Create internal guides and hold regular training sessions to ensure your team can present contract assets and liabilities correctly every time. This removes guesswork and ensures consistency across your financial statements.
Contract assets require active monitoring, especially in businesses with long-term projects like software, construction, or telecom. Since they represent value you’ve delivered but can't yet bill for, you need to keep a close eye on them. Tracking these assets helps you report earnings based on the work you’ve actually completed, not just when you send an invoice. This is a core principle of handling contract assets under ASC 606. Set up a system to regularly review the status of each contract asset and the conditions that will convert it into an account receivable. This proactive approach gives you a much clearer, more accurate picture of your company’s financial health and performance over time.
Good documentation is your best friend during an audit and for internal clarity. For every contract asset, you should be able to provide a clear explanation of the goods or services that were transferred but not yet billed, and when you expect to receive payment. Standardizing this process across all contracts creates consistency and makes it easy for anyone to understand the story behind the numbers. Your documentation should be detailed enough to support your financial statements and answer any questions that might come up from stakeholders or auditors. This isn't just about ticking a box; it's about creating a transparent and defensible record of your revenue-generating activities.
When your CRM, billing platform, and accounting software don't communicate, you’re left with data silos and a high risk of manual error. Creating a single source of truth is essential for managing your assets effectively. With a unified view of your data, your team can make better judgment calls, like distinguishing between a price concession and a credit loss. HubiFi offers seamless integrations that connect your disparate systems, automating data flows and ensuring everyone is working from the same accurate information. This eliminates confusion, reduces the time spent on manual reconciliation, and gives you a reliable foundation for all your financial reporting and strategic planning.
What's the simplest way to tell a contract asset from an account receivable? Ask yourself this one question: "Can I send the bill right now?" If the answer is yes, and the only thing you're waiting on is for the payment due date to arrive, you have an account receivable. If the answer is no because you still have to finish another task or hit a milestone for the customer, you have a contract asset. It’s all about whether your right to get paid is conditional or unconditional.
Why is it so important to separate contract assets and accounts receivable? Separating them gives a much more honest picture of your company's financial health. An account receivable is a direct claim to cash, making it a very liquid asset. A contract asset, however, still has some performance risk attached to it—you have to complete more work before you can bill for it. For investors, lenders, and even your own leadership team, this distinction clarifies what cash is a sure thing versus what is still dependent on future actions, which is a key requirement under accounting standards like ASC 606.
Does creating a contract asset change my company's revenue or profit? No, it doesn't. The revenue is recognized on your income statement at the moment you earn it by completing the work, which is the same moment the contract asset is created on your balance sheet. The transition from a contract asset to an account receivable is purely a reclassification on the asset side of your balance sheet. It doesn't touch your income statement; it simply shows that a conditional asset has now become an unconditional one.
What happens to a contract asset if the project stalls or the conditions for billing are never met? This is where risk management comes in. If it becomes clear that you won't be able to meet the conditions required to convert the asset into an account receivable, you'll need to assess the contract asset for impairment. This means you have to determine if it has lost value and potentially write it down as a loss. This is why it's so important to monitor your contract assets closely and not just assume they will all eventually turn into cash.
What's the most common mistake companies make when managing these assets? The most common mistake is trying to track everything manually in spreadsheets. When your project data, contracts, and accounting software are disconnected, it’s incredibly easy to miss the moment a contract asset should be converted to an account receivable. This leads to inaccurate financial statements and a painful month-end close. Having integrated systems that create a single source of truth is the best way to avoid these errors and ensure your reporting is always accurate.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
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