What is accounts receivable?

In plain English

Accounts receivable (AR) is an asset. It rises when you send an invoice and falls when the customer pays. Income is counted when you earn it on the accrual basis, even though cash has not arrived.

The aging report groups receivables by how late they are and is the main tool for collections. The AR total should match the aging report total.

Why it matters

Sales on paper do not pay rent. A business can show a healthy profit while its checking account runs dry because customers are slow to pay. Watching receivables tells you how much of your income is still sitting with clients, and which ones need a reminder before the balance gets harder to collect.

Lenders often ask for a receivables aging when you apply for a line of credit, and some will lend against current invoices. If your receivables list is full of old, disputed or already paid invoices, it weakens that application and can mislead you about the cash you can count on next month.

Worked example

You invoice a client $2,400 on March 1 with net 30 terms. On March 31 the $2,400 sits in receivables. If still unpaid on April 20, it shows in the 1-30 days late column.

How to handle it

1. Create an invoice for every sale on credit, with clear payment terms and a due date.
2. When a payment arrives, receive it against the matching invoice rather than recording it as new income.
3. Review the receivables aging each week and contact customers whose invoices have passed the due date.
4. Apply any credit memos or partial payments to the correct invoices so the open balance is accurate.
5. At month end, confirm that the aging total equals the receivables balance on the balance sheet.

Common mistakes

• Depositing a customer payment as income without linking it to the invoice, which overstates revenue and leaves the invoice showing as unpaid.
• Leaving uncollectible invoices on the books for years, which inflates assets and makes the business look stronger than it is.
• Sending invoices late or without due dates, which pushes back when cash arrives and makes follow-up awkward.
• Not matching customer deposits or retainers to the right job, so one client looks overdue while another shows a credit.

Not the same as: Deferred revenue

Accounts receivable is money customers owe for work you already delivered. Deferred revenue is money customers already paid for work you have not delivered yet. See Deferred revenue.

Go deeper

• Accounts Receivable Basics: Track What You're Owed: How to manage accounts receivable: aging reports, payment terms, credit limits and a weekly routine that keeps customer balances from piling up.
• How to Collect Late Payments From Customers: A staged approach to collecting overdue invoices: reminders, calls, formal notices, payment plans and when to involve an attorney or collections.

Try it

Use the related free tool.

Related terms

• Accrual basis accounting: A method that records income when it is earned and expenses when they are incurred, not when cash moves.
• Accrued expense: A cost you have incurred but not yet paid or been billed for, recorded so the right period carries it.
• Accounts payable: Money your business owes to suppliers and vendors for bills it has received but not yet paid.

Common questions

General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.