What Is Accounts Receivable?
Money customers owe you for invoiced sales not yet collected.
Detailed Explanation
AR is an asset on the balance sheet. Aging and DSO track collection health.
Example
Open client invoices of $25k are recorded as accounts receivable.
Why It Matters
AR quality directly affects liquidity and growth capacity.
Key facts
- Accounts receivable (AR) represents money owed to a business by customers for goods or services delivered but not yet paid.
- AR is recorded as a current asset on the balance sheet — typically expected to be collected within 30–90 days.
- AR turnover ratio = Net credit sales ÷ Average AR; the higher the ratio, the faster the business collects from customers.
- Days Sales Outstanding (DSO) is the most common AR efficiency metric. The 2026 U.S. small-business average DSO is 38 days; under 35 is healthy, over 60 signals collection problems.
- Aged AR over 90 days has a 26% probability of never being collected (Dun & Bradstreet, 2025–2026).
How it shows up in practice
A boutique digital agency in Brooklyn carries $187,000 in AR across 23 client accounts at month-end. Of that, 78% is current (under 30 days), 14% is 30–60 days, 5% is 60–90 days, and 3% is over 90 days. The owner spends one Friday afternoon every two weeks on AR collections — friendly reminders for 30+, firm calls for 60+, and a final demand letter at 90 days before sending to a small-claims path or writing off.
Common mistakes
- Not running an AR aging report monthly, so collection problems compound silently.
- Continuing to ship work to chronically late-paying clients instead of pausing new orders.
- Treating all overdue invoices the same instead of escalating by aging bucket.
- Failing to capture customer payment-method preferences (ACH, card, check) at onboarding, slowing collections.
- Writing off bad debt without exhausting collection options (small-claims court, collections agencies for $1K+ amounts).
Frequently asked questions
What's the difference between accounts receivable and revenue?
Revenue is recognized when earned (under accrual accounting) regardless of payment. AR is the portion of revenue not yet collected. Cash sales generate revenue without ever appearing in AR.
How do I calculate days sales outstanding (DSO)?
DSO = (Average AR ÷ Total credit sales) × Number of days in period. For example, if you have $50K average AR on $300K of quarterly credit sales (90 days), DSO = ($50K ÷ $300K) × 90 = 15 days.
Should I sell my receivables (factor) to improve cash flow?
Factoring costs 2–4% per invoice and can become structural. Best for one-time emergencies or seasonal cash gaps. For ongoing cash issues, fix collections first — better terms, faster reminders, and frictionless payment options usually address the root cause.
When should I write off a receivable as bad debt?
Common practice: 90+ days past due with no customer response after a final demand letter, or when the customer files bankruptcy. Document collection attempts; the IRS allows bad-debt deductions for accrual-basis taxpayers.
What's the difference between AR and notes receivable?
AR is short-term trade credit from regular business operations. Notes receivable involves a formal promissory note with specific repayment terms and often interest, typically used for larger or extended-term arrangements.
Related Resources
Last verified: May 2026
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