Accounts Receivable
Money owed to a company by customers who have purchased goods or services on credit but have not yet paid.
What is Accounts Receivable?
Accounts receivable (AR) is a current asset on the balance sheet representing money owed to a company by its customers for goods or services already delivered but not yet paid for. AR arises when a company sells on credit — extending payment terms (typically 30, 60, or 90 days) to customers. The days sales outstanding (DSO) ratio measures how long on average it takes to collect receivables: DSO = (AR / Revenue) × 365. High DSO may indicate slow-paying customers or collection problems. As receivables grow faster than revenue, working capital increases but cash is tied up. AR must be reserved against with an allowance for doubtful accounts when collection is uncertain.
Example
A software company invoices $1 million to a corporate client on January 1, with 60-day payment terms. The $1 million is recorded as revenue immediately under accrual accounting, and as a $1 million accounts receivable asset on the balance sheet. When the client pays on March 1, the AR balance decreases by $1 million and cash increases by $1 million.
Source: FASB ASC 310 — Receivables