What are accounts receivable?
Accounts receivable tracks money customers owe after goods or services have been delivered. It is a balance-sheet asset, but it is not cash in the bank.
By Dominic Okoye · Staff Writer
· 4 min read
Accounts receivable, usually shortened to AR or A/R, is money customers owe a company for goods delivered or services already provided on credit. It is generally recorded as a current asset because the company expects to turn unpaid invoices into cash in the short term, typically within a year. For a SaaS business, AR is a timing and collection issue: a service may be delivered before cash arrives.
AR is not cash. An invoice can be valid and still be unpaid, overdue or ultimately uncollectible. Receivables contribute to working capital and liquidity, but their value depends on collection.
How accounts receivable works in a customer sale
A receivable arises when a seller lets a buyer pay after receiving a product or service. The unpaid amount is commonly tracked through an invoice stating the amount due, due date and payment terms. Terms establish the payment deadline and may include early-payment discounts or interest charges.
- Deliver: The company provides the contracted service or product.
- Invoice: It sends the customer a bill with the amount owed and payment terms.
- Record AR: Until payment arrives, the invoice is part of accounts receivable on the seller's books.
- Collect: When the customer pays, the seller reduces AR and increases cash by the amount collected.
Under accrual accounting, revenue is recognized when the company performs the service or delivers the product, even if payment has not yet been received. Revenue, AR and cash can therefore move at different times. The bookkeeping treatment differs under cash-basis accounting.
One sale, two books
Consider a $10,000 credit sale with 30-day payment terms.
- On the seller's books: The $10,000 is accounts receivable. The seller has a claim for payment, but not the cash.
- On the buyer's books: The same $10,000 is accounts payable, or AP. AP is money the buyer owes a supplier.
- When the buyer pays: The seller's AR decreases by $10,000 and cash increases by $10,000. The buyer clears its payable.
AR is money owed to a company; AP is money that company owes others. They are opposite entries in the same credit transaction.
Why AR appears as an asset
AR appears in the current-assets section of a balance sheet because an unpaid customer obligation has value and is expected to convert to cash relatively soon. It can help a company cover short-term obligations, but it remains a claim to cash until the customer pays.
When payment terms lengthen or invoices remain unpaid, cash can be tied up in receivables. Collecting an existing invoice increases cash and reduces AR; it does not create a new sale.
How finance teams monitor accounts receivable
AR aging
An AR aging schedule groups unpaid customer invoices by how long they have been outstanding or past due. Common buckets include 0 to 30 days, 31 to 60 days, 61 to 90 days, and more than 90 days. The report helps teams track outstanding invoices and identify potential cash-flow issues.
Days sales outstanding and turnover
Days sales outstanding, or DSO, measures the average number of days a company takes to collect payment after a sale.
Accounts receivable turnover measures how often a company collects its average receivables during a period. A common calculation is:
AR turnover = net annual credit sales / average accounts receivable
A practical AR check
- What is due, and when? Keep invoice amounts, due dates and payment terms current.
- How old is the balance? Review the aging schedule to track invoices that remain outstanding.
- Who owes it? Customer creditworthiness and the size of the exposure affect collection risk when a company extends credit.
Accounts receivable records completed business for which payment remains pending. The key distinction is straightforward: it is an asset on the balance sheet, not cash already collected.
Frequently asked questions
What is the difference between accounts receivable and accounts payable?
Accounts receivable is money customers owe a company for goods or services already received. Accounts payable is money that company owes suppliers or other parties. In one credit sale, the seller records AR and the buyer records AP.
Why is accounts receivable an asset if the business has not received cash?
It is an asset because the company has a claim to payment for goods or services it already delivered and expects to collect the money. It is generally classified as a current asset because collection is expected in the short term, typically within a year. It remains distinct from cash until the customer pays.
How does an accounts receivable aging schedule work?
An AR aging schedule groups unpaid customer invoices by the time they have been outstanding or past due. Typical buckets include 0 to 30, 31 to 60, 61 to 90, and over 90 days. It helps a company track outstanding invoices and identify potential cash-flow issues.
What do days sales outstanding and accounts receivable turnover measure?
DSO measures the average number of days a company takes to collect payment after a sale. AR turnover measures how often the company collects its average receivables during a period.
Sources
- Accounts Receivable (AR): Definition, Uses, and Examples - Investopedia — www.investopedia.com
- Accounts receivable - BDC — www.bdc.ca
- accounts receivable | Wex | US Law | LII / Legal Information Institute — www.law.cornell.edu
- Accounts Receivable: A Quick Guide | CO- by US Chamber of Commerce — www.uschamber.com
- What Is Accounts Receivable? | SAP — www.sap.com
