What Is Accounts Receivable (AR)? Definition, Process, Examples and Journal Entries
Quick answer: Accounts receivable (AR) is the money a business is owed by customers for goods or services it has already delivered on credit. It is recorded as a current asset on the balance sheet because it is normally collected within one year. AR is also called trade receivables.
Accounts receivable at a glance
| Item | Answer |
|---|---|
| Definition | Amounts customers owe for credit sales that have been invoiced but not yet paid |
| Also called | AR, A/R, trade receivables, receivables |
| Type of account | Current asset (balance sheet) |
| Normal balance | Debit |
| Created by | A sale on credit terms, such as Net 30 or Net 60 |
| Cleared by | Customer payment, credit memo, or write-off |
| Opposite of | Accounts payable (money a business owes its suppliers) |
| Key metrics | DSO, AR turnover ratio, collection effectiveness index (CEI), AR aging |
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)
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | $10,000 | |
| Sales revenue | $10,000 |
Journal entry when the customer pays (March 28)
| Account | Debit | Credit |
|---|---|---|
| Cash | $10,000 | |
| Accounts receivable | $10,000 |
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.
| Current assets (excerpt) | Amount |
|---|---|
| Cash and cash equivalents | $250,000 |
| Accounts receivable | $400,000 |
| Less: allowance for doubtful accounts | ($12,000) |
| Accounts receivable, net | $388,000 |
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
| Accounts receivable | Accounts payable | Notes receivable | |
|---|---|---|---|
| What it is | Money customers owe you | Money you owe suppliers | Money owed to you under a formal written promissory note |
| Classification | Current asset | Current liability | Current or long-term asset |
| Typical terms | Net 30 to Net 90, usually no interest | Net 30 to Net 90 | Fixed schedule, usually with interest |
| Created by | Your credit sales | Your credit purchases | Signed note, often for larger or longer-term amounts |
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
The accounts receivable process covers everything from approving a customer for credit to collecting and recording payment. It usually has seven steps:
| Step | What happens | Usually owned by | Key metric |
|---|---|---|---|
| 1. Credit approval | Assess the customer and set a credit limit and payment terms | Credit team | Order hold time, bad debt |
| 2. Invoicing | Send an accurate invoice when goods ship or services are delivered | Billing | Invoice accuracy, time to invoice |
| 3. Monitoring | Track open invoices and their age | AR team | AR aging |
| 4. Collections | Remind customers and follow up on overdue invoices | Collections | DSO, CEI |
| 5. Disputes and deductions | Investigate and resolve short payments and claims | AR with sales, logistics, customer service | Dispute resolution time |
| 6. Cash application | Match each payment to the invoices it pays and post it | Cash application | Auto-match rate, unapplied cash |
| 7. Reporting and write-offs | Review metrics, adjust the allowance and write off uncollectible balances | AR manager, controller | Bad debt ratio |
1. Credit approval
Before selling on credit, assess whether the customer can pay, using financial statements, credit reports, trade references and payment history. Set a credit limit and terms such as Net 30. Good credit decisions prevent most collection problems later. Credit risk management software can score customers and monitor them continuously.
2. Invoicing
Send the invoice as soon as goods ship or services are delivered, with the correct price, quantity, purchase order number, due date and payment instructions. Every day of invoicing delay adds a day to collection time, and errors give customers a reason to hold payment.
3. Monitoring receivables
Track every open invoice in an accounts receivable aging report, grouped by how many days it is past due. Review it at least weekly to spot slow-paying customers early.
4. Collections
Remind customers before the due date, then follow up on overdue invoices by email, phone or portal. Prioritize by amount and risk rather than working the list from top to bottom, and escalate consistently when payment does not arrive.
5. Disputes and deductions
Customers sometimes short-pay because of pricing errors, damaged goods, promotions or missing proof of delivery. Log each dispute with a reason code, route it to the team that can resolve it and close it quickly so collectible cash is not held up.
6. Cash application
When payments arrive, match each one to the invoices it pays using the remittance details, then post it to the ledger. This is cash application. Until it is done, paid invoices still look open and the customer’s credit limit stays used up.
7. Reporting and write-offs
Track DSO, AR turnover and aging monthly, adjust the allowance for doubtful accounts, and write off balances that will not be collected as bad debt.
AR process example timeline
| Day | Step | Event |
|---|---|---|
| 0 | Credit approval | New customer approved for a $25,000 limit on Net 30 terms |
| 1 | Invoicing | Goods ship; $10,000 invoice sent the same day |
| 24 | Collections | Automated reminder sent one week before the due date |
| 31 | Monitoring | Invoice due; still unpaid, it moves into the 1–30 days past due bucket |
| 35 | Collections | Collector calls; customer confirms payment is scheduled |
| 38 | Cash application | $10,000 ACH payment received, matched to the invoice and posted |
Accounts receivable is one part of the wider order-to-cash process, which starts with the customer order and ends with cash applied in the ledger.
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.
| Customer | Current | 1–30 days past due | 31–60 days | 61–90 days | 90+ days | Total |
|---|---|---|---|---|---|---|
| Customer A | $40,000 | $5,000 | – | – | – | $45,000 |
| Customer B | $12,000 | – | $8,000 | – | – | $20,000 |
| Customer C | – | – | – | $6,000 | $4,000 | $10,000 |
| Total | $52,000 | $5,000 | $8,000 | $6,000 | $4,000 | $75,000 |
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
| Metric | Formula | What it tells you |
|---|---|---|
| Days sales outstanding (DSO) | (Accounts receivable ÷ Total credit sales) × Number of days | Average number of days it takes to collect after a sale |
| AR turnover ratio | Net credit sales ÷ Average accounts receivable | How many times AR is collected during the period |
| Average accounts receivable | (Beginning AR + Ending AR) ÷ 2 | The AR balance used in the turnover ratio |
| Collection effectiveness index (CEI) | (Beginning AR + Credit sales − Ending total AR) ÷ (Beginning AR + Credit sales − Ending current AR) × 100 | Share of collectible AR actually collected in the period |
| Average days delinquent (ADD) | DSO − Best possible DSO | How late customers pay beyond agreed terms |
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, a global medical supplies leader achieved more than 90% automatic cash posting after automating cash application with Emagia (read the case study).
Struggling with slow collections and high DSO?
See how Emagia’s AI-powered receivables platform automates collections, cash application and deductions for global enterprises.
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.
What are the steps in the accounts receivable process?
The accounts receivable process has seven steps: credit approval, invoicing, monitoring open invoices, collections, dispute and deduction resolution, cash application, and reporting and write-offs.
Who is responsible for accounts receivable?
Accounts receivable is usually managed by the finance department. Credit, billing, collections and cash application teams each handle part of the process, typically reporting to an AR manager, controller or CFO.
