Accounts receivable (AR) is money customers owe a business for goods or services already delivered on credit. It is generally recorded as a current asset when collection is expected within the normal operating cycle or within one year.
How accounts receivable works
A credit sale creates both revenue and a receivable. Collecting the invoice later changes the asset from accounts receivable to cash; it does not create revenue a second time.
Journal-entry example
A consulting company completes $6,000 of work and gives the client 30 days to pay:
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | $6,000 | — |
| Service revenue | — | $6,000 |
When the customer pays:
| Account | Debit | Credit |
|---|---|---|
| Cash | $6,000 | — |
| Accounts receivable | — | $6,000 |
See our T-account guide for a visual explanation of debit and credit posting.
Accounts receivable vs. accounts payable
| Feature | Accounts receivable | Accounts payable |
|---|---|---|
| Meaning | Customers owe the business | The business owes suppliers |
| Classification | Asset | Liability |
| Created by | Credit sales | Credit purchases |
| Operational goal | Collect accurately and promptly | Pay on agreed terms without disruption |
The related accounts payable turnover ratio measures supplier-payment activity, not customer collections.
Gross vs. net accounts receivable
Not every invoice will be collected. Under accrual accounting, a business estimates expected credit losses using an allowance account.
Net accounts receivable = Gross accounts receivable − Allowance for credit losses
If gross AR is $200,000 and the allowance is $8,000, net AR is $192,000. The allowance is not a list of invoices that have definitely failed; it is an estimate based on relevant information and accounting policy.
How to read an AR aging report
| Age | Typical interpretation | Action |
|---|---|---|
| Current | Not yet due | Confirm invoice delivery |
| 1–30 days past due | Early collection stage | Send reminder and resolve disputes |
| 31–60 days | Increasing risk | Direct contact and payment commitment |
| 61–90 days | High attention | Escalate under credit policy |
| Over 90 days | Potential impairment | Review allowance, collection, or write-off |
Aging buckets are management tools, not a substitute for evaluating customer-specific risk.
Accounts receivable metrics
Receivables turnover
Net credit sales ÷ Average net accounts receivable
Days sales outstanding (DSO)
Average accounts receivable ÷ Net credit sales × Days in period
If annual credit sales are $1,200,000 and average AR is $150,000, turnover is 8 times and approximate DSO is 45.6 days (365 ÷ 8).
DSO should be compared with payment terms, customer mix, seasonality, and the company’s own trend. A 45-day DSO may be reasonable with net-45 terms and poor with net-15 terms.
Seven ways to improve collections
- Perform credit checks proportionate to the exposure.
- Use written payment terms before work begins.
- Issue accurate invoices immediately.
- Offer convenient, secure payment methods.
- Send reminders before and after the due date.
- Track disputes separately from unwillingness to pay.
- Escalate consistently and document payment plans.
A good CRM sales process can preserve agreed terms, purchase-order details, and customer commitments before they become collection problems.
Month-end AR checklist
- Reconcile the AR subledger to the general ledger.
- Investigate unapplied cash and credit balances.
- Review invoices without supporting delivery evidence.
- Update the aging report.
- Assess the allowance for expected credit losses.
- Confirm cut-off around period end.
- Report concentrations and overdue disputes.
Frequently asked questions
Is accounts receivable revenue?
No. Revenue is the income recognized from the sale; AR is the asset representing the unpaid amount.
Is accounts receivable taxable income?
Tax timing depends on the taxpayer’s accounting method and applicable law. Accrual-method businesses may recognize income before collection, while cash-method treatment can differ. Consult current tax rules.
What is a bad-debt write-off?
It removes a specific uncollectible receivable. Under the allowance method, the write-off typically reduces both gross AR and the allowance, without recording a new expense at that moment.
Source reviewed: OpenStax journal entries and T-accounts. Last reviewed August 15, 2026.
This article provides general educational information and is not accounting or tax advice.