What it means
Accounts receivable, often shortened to AR, is money customers owe you for work you've delivered and invoiced. It's an asset on the balance sheet, because it's cash the company has a right to collect.
Picture a stack of IOUs from customers. Each open invoice is one IOU, and the receivables balance is the total of the stack.
When you invoice for delivered work, you record revenue and a receivable at the same time. When the customer pays, cash goes up and the receivable goes down. Revenue doesn't change again. At each close, the receivables balance in your books should equal the open invoices in your billing system.
The aging report sorts those open invoices by how long they've been outstanding, usually in 30-day buckets. Days sales outstanding (DSO) turns the balance into an average collection time you can compare with your payment terms.
Acme delivers March's service and invoices the customer $2,500 on March 31, due in 30 days. March's P&L shows $2,500 of revenue and the balance sheet shows a $2,500 receivable. When the customer pays in April, cash rises by $2,500 and the receivable drops to zero. If May arrives with no payment, the invoice moves into the overdue columns of the aging report and someone should be chasing it.
Some invoices never get paid, so GAAP asks for an allowance for credit losses against the balance. ASC 606 decides when the revenue and the receivable are recorded. A company can show healthy revenue and still run short of cash if customers pay slowly.
Why it matters. Revenue you can't collect isn't cash. An aging report shows who's late, and a balance that keeps growing faster than revenue is an early warning.
Try it with your numbers
Change any number. The working below updates as you type.
DSO = Average receivables ÷ Revenue on credit × Days in the periodInvoiced revenue for the period; leave out card sales paid at once.
90 for a quarter, 365 for a year.
Your payment terms.
Days sales outstanding
60.0 days
How it’s worked out
- 1Average receivables($180,000.00 + $220,000.00) ÷ 2$200,000.00
- 2Revenue on credit per day$300,000.00 ÷ 90 days$3,333.33
- 3DSO$200,000.00 ÷ $300,000.00 × 9060.0 days
- 4Receivables at 30 days$3,333.33 × 30 days$100,000.00
- 5Cash tied up beyond 30 days$200,000.00 − $100,000.00$100,000.00
DSO is a ratio, not a GAAP figure. Compare it with your payment terms: net 30 terms and a 55-day DSO means customers pay late, which the aging report shows by name.
The entry, worked
Acme delivers March's service to a customer on monthly terms and invoices $2,500 on March 31, due in 30 days.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | $2,500.00 | |
| Revenue | $2,500.00 | |
| Total | $2,500.00 | $2,500.00 |
March gets the revenue it earned, and the $2,500 sits in receivables until the customer pays in April.
Common questions
Is accounts receivable the same as revenue?
No. Revenue is what you earned; receivables are the part you've billed and not yet collected. A prepaying customer creates revenue over time and no receivable at all.
What's a healthy receivables balance?
It depends on your payment terms. Days sales outstanding, receivables divided by revenue per day, shows whether customers pay on time; compare it to your terms, not to another company's.
When should I write off an unpaid invoice?
When collection is no longer reasonably expected, such as a customer in bankruptcy or an invoice your collections process has given up on. Write it off against the allowance for credit losses, so the expense was already in the month you estimated it, not the month you gave up.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
- Accounts receivableWhat customers owe us for invoices already issuedGlossary
- Audit-ready books before your Series AInvestors, lenders and auditors ask for the same things: accrual statements, reconciled accounts and support for every balance. How to be ready first.Guide · 4 min
- Deferred revenue for SaaS startups, explainedAn annual prepayment is cash today and revenue over a year. How deferred revenue works under ASC 606, why it’s a liability, and the schedule behind it.Guide · 4 min
- Balance sheet explained for startupsAssets equal liabilities plus equity. What each startup line means, from deferred revenue to the SAFE and the accumulated deficit, and why it must balance.Guide · 7 min
- Cash flow statement explained: why profit isn’t cashHow the cash flow statement starts at net income, adds back non-cash costs and working capital, splits three activities and ties to the balance sheet.Guide · 5 min
- General ledger and double-entry bookkeeping, explainedHow double entry works: journal entries, debits and credits, normal balances, running balances, the trial balance, and why posted entries are reversed.Guide · 6 min
- Chart of accounts for startups: a starting templateA starting chart of accounts for a US startup: number ranges, the expense accounts you need, and when to add an account versus a class or tracking tag.Guide · 6 min
- What to put on an invoice: a field-by-field guideThe fields a B2B invoice needs to get paid on time: legal names, a numbering sequence, dates, terms, tax lines, PO and remit-to, and how to fix one.Guide · 7 min
- AR aging and collections: a practical guide for startupsHow to read an AR aging, work out DSO, run a dunning cadence, record a promise to pay, escalate a late account and clear unapplied cash.Guide · 6 min
- Payment terms explained: Net 30, discounts and late feesHow to choose payment terms, count a due date, price an early-payment discount, set lawful late fees and work with enterprise procurement.Guide · 6 min
- Bad debt and write-offs: allowance vs direct methodHow to book a customer who won’t pay: the GAAP allowance under ASC 326, the direct write-off the IRS requires, and what to do if the money comes back.Guide · 7 min
- SaaS revenue recognition under ASC 606, step by stepASC 606’s five steps applied to a startup SaaS contract: annual prepay, implementation fees, usage and multi-year deals, with the entries.Guide · 6 min
- Card and ACH payments: applying and reconciling themHow customer card and ACH payments land in the bank net of fees, how to apply them to invoices, handle partial payments and reconcile the deposit.Guide · 6 min
- Accounts, and the five typesEvery account belongs to exactly one of five types, and its type decides which side increases it. Get the type right and the entry writes itself.Lesson 3
- Recording the monthThirteen things happened to Northwind in September. Here is every one of them turned into an entry, with the reasoning that produced it.Lesson 5
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.