What Is Accounts Receivable

Accounts receivable refers to the outstanding invoices or money that a business is owed by its customers for goods or services delivered but not yet paid for. It represents a key component of a company’s balance sheet and is classified as a current asset, since it is expected to be converted into cash within a short period, typically 30 to 90 days. 

When a company sells products or services on credit, it records the transaction as an account receivable, essentially creating an obligation for the customer to pay at a later date. Effective management of accounts receivable helps in maintaining healthy cash flow, ensuring the business has enough liquidity to meet its day-to-day operational needs. 

Companies often establish credit policies and follow up with collections processes to reduce the risk of late payments or defaults. Accounts receivable can also serve as a measure of a company’s financial stability and customer relationships, as it reflects both sales activity and the trust placed in clients to fulfill their payment obligations.

What Accounts Receivable Can Tell You for Your Business

Accounts Receivable (AR) is more than just a number on your balance sheet — it’s a window into your business’s financial health and operational efficiency. Here’s what it can reveal:

• Cash Flow Health: High AR balances may indicate you're not collecting payments quickly, which can lead to cash flow issues. If too much money is tied up in receivables, you may struggle to pay your own bills.
• Customer Relationships: Accounts receivable can help identify which customers are reliable and which may be becoming credit risks. Reviewing aging reports shows who pays on time and who habitually delays.
• Operational Efficiency: AR turnover ratio — how often receivables are collected during a period — indicates how efficiently your business manages credit sales and collections.
• Sales Trends: AR trends can help you assess sales performance, especially if your business offers credit terms. Spikes may reflect strong sales, but only if payments are coming in as expected.
• Risk Exposure: A concentrated AR portfolio (e.g., a few customers make up most of your receivables) increases your financial vulnerability if one fails to pay.
• Financial Ratios & Creditworthiness: Lenders and investors often look at your AR metrics — like DSO (Days Sales Outstanding) — to evaluate the strength of your cash conversion cycle.

Accounts Receivable Example

Business: A small marketing agency called.

Scenario: On March 5th, the marketing agency completes a project for a client and sends an invoice for $3,000, with payment due in 30 days.

Accounting Impact:

• On March 5th, the company records:
  
  • Accounts Receivable: $3,000
  • Revenue: $3,000

This means income was earned, but cash hasn’t been received yet.

When the Client Pays:

On April 2nd, the client pays the invoice.

The business then updates its books:

• Reduce Accounts Receivable by $3,000
• Increase Cash by $3,000

What This Reveals:

• The company extended credit to the client.
• The client paid 2 days after the due date — something to monitor.

Accounts Receivable vs Accounts Payable

Accounts Receivable (AR) and Accounts Payable (AP) are two sides of the same coin in business accounting — one tracks money coming in, the other tracks money going out.