Accounts Receivable (AR)

What Is Accounts Receivable?

Accounts receivable is the money customers owe a business for goods or services already delivered but not yet paid for. Recorded as a current asset on the balance sheet, accounts receivable represents revenue that has been earned and invoiced under net terms but has not yet converted into cash.

How Accounts Receivable Works

A receivable is created the moment a company delivers and invoices. Suppose a software vendor signs a $120,000 annual contract billed upfront on Net 45 terms. Revenue recognition begins, the invoice posts, and $120,000 sits in accounts receivable until the buyer's finance team releases payment. None of that balance is cash. It cannot make payroll or fund a hire.

Three variables drive the size of the balance: how much you sell on credit, how long your net terms run, and how reliably customers pay on time. Moving terms from Net 30 to Net 60 does not change revenue by a dollar, but it roughly doubles the cash parked in receivables. That is why enterprise procurement pushes for Net 60 and Net 90. Your balance sheet ends up financing the buyer's working capital at no charge.

Collections work attacks the balance from the other side. Dunning sequences, reminder emails, escalation to an executive sponsor, and structured payment plans all exist to move invoices from outstanding to paid before they age into risk.

How to Calculate Accounts Receivable and Days Sales Outstanding

The balance itself is a roll forward: beginning accounts receivable, plus credit sales for the period, less cash collected, equals ending accounts receivable. The number that actually tells you something is days sales outstanding, which restates the balance as time.

Formula: DSO = (Accounts Receivable / Credit Sales) x 365

Worked example: a company books $6,000,000 of credit sales in a year and carries an average accounts receivable balance of $1,150,000. DSO is ($1,150,000 / $6,000,000) x 365, or 70 days. If stated terms are Net 45, the business is running 25 days past its own policy. Pulling DSO back to 45 days would release roughly $410,000 of trapped cash, a permanent liquidity gain that costs nothing in margin.

Accounts Receivable in Plain English

Accounts receivable is the stack of "we will pay you soon" sitting where cash should be. You did the work. You sent the bill. The money is somewhere in a buyer's approval queue. On paper the company looks profitable, and in the bank account it may be tight. Businesses fail with healthy income statements and empty checking accounts, and receivables are usually where that gap lives.

What Is an AR Aging Report?

An AR aging report buckets every open invoice by how long it has been outstanding: current, 1 to 30 days past due, 31 to 60, 61 to 90, and over 90. It is the most useful page in a monthly close packet, because collectability falls sharply with age. Once an invoice passes 90 days past due it is materially less likely to be collected in full, and by 180 days most finance teams reserve against it.

Aging also exposes concentration. If 40 percent of the balance sits with three logos, one customer's cash crunch becomes your cash crunch. Reading concentration alongside aging is how a CFO spots trouble two quarters early.

Bad Debt, Net Terms, and Receivables Financing

Bad debt is the portion of accounts receivable a company concludes it will never collect. Under standard accounting it is estimated in advance through an allowance for doubtful accounts, sized from historical loss rates and the current aging profile. Booking the allowance does not create the loss, it just forces the company to be honest about it earlier.

Net terms are a pricing decision disguised as an administrative one. Offering Net 60 instead of Net 30 is a real discount. On a $100,000 invoice at a 15 percent cost of capital, an extra 30 days of float costs the seller about $1,230, and most sellers hand it over without ever pricing it into the deal.

Receivables financing converts the balance into cash early. Invoice factoring sells specific invoices at a discount. Asset based lines borrow against a percentage of eligible receivables. Both trade a slice of the invoice for time, and both are priced largely on your customers' credit quality rather than your own.

Accounts Receivable and the Closing Motion

Accounts receivable is what a fragmented close looks like on a balance sheet. A signature creates an obligation, not cash, and every day between the two is a day of risk. Ratio, the Closing Motion Platform for B2B tech, treats that gap as the problem to solve rather than a cost of doing business. In the Collect stage, Ratio Trade lets the buyer keep paying monthly or quarterly while the seller receives the full total contract value upfront, so the receivable never ages on the seller's books. Ratio underwrites the buyer and manages the payment schedule. Because Propose, Close, Collect, and Renew stay connected, renewal conversations start from real payment behavior instead of a stale aging report.

Common Questions About Accounts Receivable

Is accounts receivable an asset or a liability?

Accounts receivable is an asset, specifically a current asset, because it is expected to convert to cash within twelve months. The same invoice sits on the buyer's books as accounts payable, which is a liability. One document, two opposite entries.

What is a good DSO for a B2B software company?

It depends entirely on stated terms. A company selling on Net 30 should target DSO in the mid 30s, and a company on Net 45 should target the mid 50s. The signal that matters is the gap between DSO and stated terms; above 15 days usually means invoicing errors or weak collections follow up.

Does accounts receivable count as revenue?

No. Revenue is recognized on the income statement when the performance obligation is satisfied. Accounts receivable is the balance sheet record of what remains uncollected from that revenue. A company can grow revenue every quarter while its cash position deteriorates, and a rising receivables balance is exactly that warning.

Key Takeaways

• Accounts receivable is money earned and invoiced but not yet collected, carried as a current asset.
• DSO restates accounts receivable in days, and the gap between DSO and stated net terms is the real diagnostic.
• Extending net terms is an unpriced discount: 30 extra days on a $100,000 invoice costs about $1,230 at a 15 percent cost of capital.
• An AR aging report surfaces both collection risk and customer concentration before either hits the bank.
• Receivables financing and upfront payment models turn accounts receivable into working capital without equity dilution.