Accounts receivable (AR) is the money customers owe you for products or services they've already received but haven't paid for yet. It's recorded as a current asset on the balance sheet — the mirror image of accounts payable (AP), the money you owe others.
What Is Accounts Receivable (AR)?
Accounts receivable represents credit you've extended to customers: invoices issued, sales made on terms, and payments still owed. It includes unpaid customer invoices, credit sales, payment commitments, and outstanding bills. Because the revenue is earned but the cash hasn't arrived, AR is a key bridge between the income statement and actual cash flow. (The concept is ancient — Mesopotamian merchants tracked customer debts on clay tablets.)
Accounts Receivable vs Accounts Payable
| Accounts Receivable (AR) | Accounts Payable (AP) | |
|---|---|---|
| Direction | Money owed to you 📥 | Money you owe others 📤 |
| Source | Customer purchases on credit | Supplier purchases on credit |
| Balance sheet | Asset | Liability |
| Working capital | Increases it | Decreases it |
| Example | Customer owes you $1,000 | You owe a supplier $1,000 |
Why Accounts Receivable Matters
- Cash flow: AR shows expected incoming cash and helps you predict and plan around it.
- Business health: rising or aging AR can signal slow collections or customer credit risk.
- Financial planning: it informs budgeting, credit decisions, and growth funding.
Measuring AR: Days Sales Outstanding
The standard health check on receivables is Days Sales Outstanding (DSO) — the average number of days to collect payment:
DSO = (Accounts Receivable ÷ Total Credit Sales) × Number of DaysDays sales outstanding
A lower DSO means you collect cash faster. A climbing DSO warns that money is getting stuck in receivables.
Accounts Receivable FAQ
What is accounts receivable in simple terms?
It's money your customers owe you for things they've already bought but not yet paid for. Until they pay, that amount sits on your balance sheet as accounts receivable — an asset.
Is accounts receivable an asset or liability?
An asset — specifically a current asset, because you expect to collect the cash within a year. Accounts payable, by contrast, is a liability.
What's the difference between accounts receivable and accounts payable?
AR is money owed to you by customers; AP is money you owe to suppliers. AR is an asset that increases working capital; AP is a liability that decreases it.
What does A/R stand for?
A/R is the common abbreviation for accounts receivable — the outstanding money customers owe a business for credit sales.
