What Is Accounts Receivable (AR)? Definition, Example and Journal Entries

Accounts receivable at a glance

How accounts receivable works: a worked example

On March 1, Northwind Manufacturing ships $10,000 of parts to a customer and sends an invoice with Net 30 payment terms. Northwind has earned the revenue, but the cash will not arrive until the customer pays, which is due by March 31. Until then, the $10,000 sits in accounts receivable.

Journal entry when the credit sale is made (March 1)

Journal entry when the customer pays (March 28)

The first entry increases an asset (AR) and records the revenue. The second entry swaps one asset for another: AR goes down and cash goes up, so total assets do not change. Matching the payment to the right invoice is called cash application. For a refresher on how each side works, see debits and credits.

Where accounts receivable appears in the financial statements

Balance sheet. AR is listed under current assets, usually right after cash. Companies report it net of an allowance for doubtful accounts, which estimates the share they do not expect to collect.

Income statement. AR itself does not appear here, but the related revenue does, and so does bad debt expense when customers are not expected to pay. Learn more about bad debt expense.

Cash flow statement. Under the indirect method, an increase in AR during the period is subtracted from net income, because the company recorded revenue it has not yet collected in cash. A decrease in AR is added back.

Only businesses using accrual accounting record accounts receivable. Under cash-basis accounting, revenue is recorded only when cash arrives, so there is no AR balance.

Accounts receivable vs. accounts payable vs. notes receivable

One company’s accounts receivable is another company’s accounts payable. When Northwind invoices its customer, Northwind records AR and the customer records AP for the same $10,000.

Types of receivables

• Trade receivables: amounts owed by customers for normal sales of goods or services. This is what “accounts receivable” usually means.
• Non-trade receivables: amounts owed for other reasons, such as employee advances, insurance claims, tax refunds or interest due.
• Notes receivable: amounts owed under a signed promissory note, usually with interest and a fixed repayment date.

The accounts receivable process, step by step

1. Credit approval: assess the customer’s creditworthiness and set a credit limit and payment terms. See credit risk management.
2. Invoicing: send an accurate invoice promptly after delivery. Every day of invoicing delay adds a day to collection time.
3. Monitoring: track open invoices in an AR aging report grouped by days outstanding.
4. Collections: send reminders and follow up on overdue invoices, prioritizing by amount and risk. See accounts receivable collections.
5. Disputes and deductions: resolve short payments and customer claims quickly so they do not block payment. See deductions management.
6. Cash application: match each incoming payment to the right open invoices and close them out.
7. Reporting and write-offs: review metrics, adjust the allowance for doubtful accounts, and write off balances that cannot be collected.

Accounts receivable is one stage of the wider order-to-cash (O2C) process, which runs from customer order to cash in the bank.

Example accounts receivable aging report

An aging report groups unpaid invoices by how long they have been outstanding. The older an invoice gets, the less likely it is to be collected.

In this example, about 69% of AR is current. Customer C needs attention: its entire balance is more than 60 days past due.

Key accounts receivable formulas

Example: a company with $1,200,000 in net credit sales for the year, beginning AR of $180,000 and ending AR of $120,000 has average AR of $150,000. Its AR turnover is $1,200,000 ÷ $150,000 = 8, meaning it collects its receivables about 8 times a year, or roughly every 46 days (365 ÷ 8). For what counts as healthy in your sector, see DSO benchmarks by industry.

Why accounts receivable matters to CFOs

A company can be profitable on paper and still run short of cash if its receivables are slow to convert. Revenue sitting in AR cannot pay salaries, suppliers or debt. That is why finance leaders track AR closely:

• Working capital: every day of DSO ties up roughly one day of credit sales. For a company with $1 billion in annual credit sales, that is about $2.7 million per day.
• Credit risk: the older a receivable gets, the more likely it becomes bad debt.
• Financing: receivables can be used to raise cash through factoring or as collateral for an asset-based loan.
• Investor signal: AR growing faster than revenue can indicate collection problems or overly loose credit terms.

Common accounts receivable challenges

• Late or inaccurate invoices that delay the start of the payment clock or trigger disputes.
• Unapplied cash, where payments arrive without clear remittance details and cannot be matched to invoices.
• Reactive collections that contact customers only after invoices are overdue.
• Deductions and short payments, especially in consumer goods, that leave balances open for weeks.
• Disconnected systems between the ERP, banks and customer portals, which limit real-time visibility.

How AR automation and AI improve accounts receivable

AR automation software handles repetitive tasks such as invoice delivery, payment reminders, cash matching and dispute routing. AI adds prediction: it estimates which customers are likely to pay late, recommends the best time and channel for outreach, and reads remittance data from emails and PDFs to match payments automatically.

In practice, this lets AR teams spend their time on exceptions and high-risk accounts instead of routine follow-up. For example, [Customer name] reached [verified result, e.g. “more than 95% automatic cash application across $4B in receivables”] after automating its AR process with Emagia. [Add one more verified customer result with a source link.]

Frequently asked questions about accounts receivable

Is accounts receivable an asset or a liability?

Accounts receivable is an asset. Specifically, it is a current asset, because the business expects to collect it in cash within one year. The opposite account, accounts payable, is a liability.

Is accounts receivable a debit or a credit?

Accounts receivable has a normal debit balance. It is debited when a credit sale is made and credited when the customer pays or the balance is written off.

Is accounts receivable the same as revenue?

No. Revenue is recorded on the income statement when it is earned. Accounts receivable is the balance sheet asset that represents the portion of that revenue not yet collected in cash.

What is an example of accounts receivable?

A supplier delivers $10,000 of materials and invoices the customer on Net 30 terms. Until the customer pays, the $10,000 is recorded in the supplier’s accounts receivable.

What is the difference between accounts receivable and accounts payable?

Accounts receivable is money customers owe your business and is recorded as an asset. Accounts payable is money your business owes suppliers and is recorded as a liability. The same invoice is AR for the seller and AP for the buyer.

What does A/R stand for in accounting?

A/R, or AR, stands for accounts receivable. The abbreviation is also used for the team or department that manages invoicing and collections.

What happens if accounts receivable is not collected?

If a receivable is unlikely to be collected, the company records it in the allowance for doubtful accounts and eventually writes it off as bad debt. This reduces net AR on the balance sheet and is recognized as an expense.

How can a company reduce its accounts receivable balance?

Invoice immediately and accurately, set clear credit terms, send reminders before due dates, offer easy digital payment options, resolve disputes quickly and automate cash application. Together these shorten DSO and convert AR to cash faster.

Related terms

• Accounts receivable management
• Accounts receivable aging report
• Days sales outstanding (DSO)
• Accounts receivable turnover ratio
• Cash application
• Order-to-cash process