Georgia Assessments for the Certification of Educators GACE Practice Test

Which of the following best describes accounts receivable?

1. Current assets

2. Current liabilities

3. Fixed assets

4. Fixed liabilities

The correct answer is: Fixed assets

Accounts receivable is best described as a type of current asset. It refers to the money owed to a business by its customers for goods or services that have been delivered but not yet paid for. This designation indicates that accounts receivable are expected to be converted into cash within a year, making them part of the company's current assets, which are crucial for liquidity and operational efficiency. Current assets include anything that can be easily liquidated or converted to cash within one year, such as cash, inventory, and receivables. Since accounts receivable typically arise in the normal course of business operations and are expected to be collected relatively soon, they play a vital role in assessing a company's short-term financial health and ability to cover its liabilities as they come due. In contrast, current liabilities are obligations that a company needs to pay within a year, fixed assets are long-term resources like equipment and real estate, and fixed liabilities are long-term obligations that are due beyond a year. Each of these other categories serve different purposes in financial statements and do not apply to the nature of accounts receivable.