Accounts Receivable
Last reviewed 2026-05-11 by Asad Ali, Founder & CEO
Money owed to a business by its customers for goods or services delivered but not yet paid for.
Accounts receivable (AR) represents the outstanding invoices a company has sent to customers who have not yet paid. It is classified as a current asset on the balance sheet because it represents cash the business expects to collect in the near future, usually within 30 to 90 days. Under GAAP, AR is reported net of an allowance for doubtful accounts (a contra-asset estimating uncollectible balances). Monitoring AR aging reports — buckets of Current, 1–30 days past due, 31–60, 61–90, and 90+ — helps identify slow-paying customers before bad debt becomes an issue. Companies in cash-strapped situations sometimes factor receivables (sell them to a financing company at a discount) for immediate cash, typically at an effective rate of 1–5% per month.
Formula
Days Sales Outstanding (DSO) = (Accounts Receivable ÷ Credit Sales) × Number of Days. Allowance for Doubtful Accounts = Aging-based or percentage-of-sales estimate of uncollectible ARExample
A web design agency completes a $5,000 project and sends an invoice with Net 30 terms. The journal entry is debit Accounts Receivable $5,000, credit Revenue $5,000. If the client pays in 28 days, AR drops to zero and Cash increases $5,000. If after 90 days no payment has been received and the agency estimates 10% uncollectibility risk, it records: debit Bad Debt Expense $500, credit Allowance for Doubtful Accounts $500. Net AR on the balance sheet shows $4,500. If the customer ultimately defaults at day 180, the write-off is debit Allowance $5,000, credit AR $5,000 (with an additional $4,500 bad debt expense for the unreserved portion).
Why It Matters for Your Business
High AR balances mean your cash is tied up in unpaid invoices rather than available to cover expenses, so understanding AR helps you set better credit policies.
Practical Tips
- •Send invoices immediately upon delivery to start the payment clock sooner — every day of delay extends DSO by exactly that much
- •Offer small discounts (like 2/10 Net 30) to incentivize early payment when your cost of capital justifies it
- •Automate follow-up emails at day 7, 15, and 25 — most overdue invoices are paid after the second nudge, not the first
- •Set credit limits per customer based on aging history and require deposits or COD for repeat slow payers
Common Questions About Accounts Receivable
How is accounts receivable calculated?
The formula is: Days Sales Outstanding (DSO) = (Accounts Receivable ÷ Credit Sales) × Number of Days. Allowance for Doubtful Accounts = Aging-based or percentage-of-sales estimate of uncollectible AR. See the worked example below for a step-by-step calculation using realistic numbers.
What is an example of accounts receivable?
A web design agency completes a $5,000 project and sends an invoice with Net 30 terms. The journal entry is debit Accounts Receivable $5,000, credit Revenue $5,000. If the client pays in 28 days, AR drops to zero and Cash increases $5,000. If after 90 days no payment has been received and the agency estimates 10% uncollectibility risk, it records: debit Bad Debt Expense $500, credit Allowance for Doubtful Accounts $500. Net AR on the balance sheet shows $4,500. If the customer ultimately defaults at day 180, the write-off is debit Allowance $5,000, credit AR $5,000 (with an additional $4,500 bad debt expense for the unreserved portion).
Why does accounts receivable matter for my business?
High AR balances mean your cash is tied up in unpaid invoices rather than available to cover expenses, so understanding AR helps you set better credit policies.
How does FiscalInsights help with accounts receivable?
FiscalInsights tracks accounts receivable automatically as part of its AI bookkeeping workflow. Connect your bank accounts and the platform handles categorization, reconciliation, and reporting without manual entry.
Related Terms
More Accounting Terms
Accounts Payable
Money owed by a business to its suppliers or creditors for goods or services received but not yet paid for.
Accrual Accounting
An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.
Asset
Any resource owned by a business that has economic value and can provide future benefits.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a specific point in time.
Bookkeeping
The process of recording daily financial transactions including sales, purchases, payments, and receipts.
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