Final answer:
True. Selling an account receivable leads to its removal from the balance sheet, as the right to receive payment is transferred to a third party.
Step-by-step explanation:
True, when a company sells an account receivable, it indeed removes that receivable from its balance sheet. This process is commonly referred to as 'factoring' and involves a company selling its receivables to a third party at a discount, in order to receive cash more quickly than waiting for the payment terms with customers. Once the transaction is complete, the account receivable is no longer an asset on the seller's balance sheet, because the right to receive the cash has been transferred to the third party. The seller will recognize a reduction of assets in the form of accounts receivable and an increase in cash or reduction in liabilities, depending on the structure of the transaction.
For example, if a company sells $10,000 of accounts receivable to a financial institution, they would record a decrease in accounts receivable and an increase in cash on their balance sheet. The financial institution would record an increase in accounts receivable and a decrease in cash on their balance sheet.
Overall, the sale of an account receivable is a common practice for companies to improve their cash flow by converting their accounts receivable into immediate cash.