Finance & Accounting
Definition
Accounts receivable (AR) is money owed to a business by its customers for products delivered or services rendered but not yet paid for. It appears as a current asset on the balance sheet and represents the business's legal right to collect payment.
When a business delivers goods or services before receiving payment, the amount owed is recorded as accounts receivable. AR is created when a sale is made on credit terms — for example, net-30 or net-60 payment terms. The AR balance on the balance sheet represents total outstanding invoices that haven't been collected. Key metrics for managing AR include Days Sales Outstanding (DSO = AR ÷ Daily Revenue), which measures how many days, on average, it takes to collect payment. A high DSO relative to payment terms indicates collection problems. AR aging reports categorize outstanding invoices by how long they've been outstanding (0–30, 31–60, 61–90, 90+ days), helping identify overdue accounts that may become bad debt. Poor AR management is a leading cause of cash flow problems even in profitable businesses.
Slow-paying customers can create serious cash flow problems even when your income statement looks healthy. An accountant or financial advisor can help you design invoicing policies, payment terms, and collection processes that reduce DSO and improve your cash conversion cycle.