What is accounts receivable (AR)?
Accounts receivable (AR) refers to the money a business is owed by its customers for goods or services delivered on credit. It is recorded as a current asset on the balance sheet because the company expects to receive payment within a short period, usually 30 to 90 days.
In simple terms, accounts receivable is the money a business is waiting to receive after making a sale but not getting paid immediately.
How accounts receivable works
Accounts receivable follows a simple cycle:
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A business delivers goods or services to a customer
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The customer is given an invoice with payment terms
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The amount is recorded as accounts receivable
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The business receives payment and clears the balance
This helps companies track incoming payments and manage their cash flow effectively.
Example of accounts receivable
Imagine you run a design agency and complete a project for a client worth $2,000. Instead of paying upfront, the client agrees to pay within 30 days.
That $2,000 is recorded as accounts receivable until the client settles the payment.
Accounts receivable vs accounts payable
These two terms are closely related but represent opposite cash flow directions:
Understanding both helps clarify a company’s overall financial position and liquidity.
Why accounts receivable matters
Accounts receivable is important because it shows how efficiently a business collects payments:
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Impacts cash flow and liquidity
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Reflects how well the company manages customer credit
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Helps investors assess financial health
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Indicates potential risks from late or unpaid invoices
Poor accounts receivable management may lead to cash flow issues even if sales are strong.
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