Accounts Receivable
Definition
Accounts receivable (AR) is the money owed to your business by customers who have received goods or services but have not yet paid. It is recorded as a current asset on your balance sheet. AR represents earned revenue that has not yet converted to cash - a critical distinction in accrual accounting. The speed at which you collect AR is measured by Days Sales Outstanding (DSO).
In plain English
Accounts receivable is your "money owed to us" list. Every time you send a customer an invoice for work you have already completed or goods you have already delivered, the unpaid balance is accounts receivable. It is real money you have earned - it just has not landed in your bank account yet.
Real-world example with numbers
You complete a $8,000 consulting project on April 15 and send an invoice.
Payment terms: Net 30 (due May 15).
April 15: Revenue increases by $8,000 (earned)
Accounts Receivable (Asset) increases by $8,000
May 12: Client pays 3 days early.
Cash (Asset) increases by $8,000
Accounts Receivable (Asset) decreases by $8,000
During April 15 – May 12, the $8,000 appears as AR on your balance sheet.
DSO for this invoice = 27 days (paid 27 days after invoice)Common misconceptions
“High accounts receivable is always a sign of good business”
High AR can mean you are growing revenue, which is positive. But it can also mean clients are slow to pay, you have collection problems, or your payment terms are too generous. Always look at AR alongside Days Sales Outstanding (DSO) to understand the quality of your receivables.
“Revenue equals cash”
In accrual accounting, revenue is recorded when earned - not when cash arrives. A business can have $200,000 of revenue on its P&L and still be cash-strapped if most of it sits in unpaid AR. This is why profitable businesses can run out of cash.
Key points
- Appears as a current asset on the balance sheet
- Represents money customers owe you for completed work or delivered goods
- High AR with slow collection can create cash flow problems even in profitable businesses
- Tracked using an aged receivables report (current, 30+, 60+, 90+ days)
- DSO (Days Sales Outstanding) benchmarks: under 30 days is excellent; over 60 days warrants action
How it relates to other accounting concepts
AR and AP are mirror images. AR is what customers owe you; AP is what you owe suppliers. Your net position (AR minus AP) affects your working capital.
AR is not cash. Until customers pay, your cash balance does not reflect your receivables. A large AR balance with slow collection is a key cash flow risk.
Revenue creates AR (in accrual accounting). When AR is collected, it converts to cash on the balance sheet - revenue on the P&L stays the same.
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