What is accounts receivable?

Published Thursday 23 July 2026

Table of contents

• Accounts receivable (definition)
• How accounts receivable works
• Accounts receivable vs accounts payable
• Accounts receivable on the balance sheet
• How to measure accounts receivable
• How to manage accounts receivable and get paid on time
• Simplify your accounts receivable with Xero
• FAQs on accounts receivable
• Related terms
• Learn more about accounts receivable

Key takeaways

• Accounts receivable is the money your customers owe you for goods or services you've already delivered but they haven't paid for yet.
• Accounts receivable sits on your balance sheet as a current asset, and it's recorded as a debit when you make the sale.
• You can track how well you collect what you're owed using the accounts receivable turnover ratio and days sales outstanding.
• Clear payment terms, prompt invoicing, and easy online payments help you turn accounts receivable into cash faster.

Accounts receivable (definition)

When you sell something and let your customer pay later, that unpaid amount becomes accounts receivable. Here's what the term means in plain language.

Accounts receivable are the invoices your customers owe you for goods or services you've delivered but they haven't paid for yet. You might also hear them called receivables, trade debtors, or AR.

Accounts receivable can also refer to the person or team inside your business who tracks those unpaid invoices and chases customers for payment.

How accounts receivable works

Accounts receivable is created every time you sell on credit instead of getting paid on the spot. The steps below show how a single sale turns into AR.

You deliver a product or service, then you issue an invoice with a due date. The amount owed sits as accounts receivable until your customer pays it.

Accounts receivable and accounts payable are two sides of the same transaction. What's a receivable for you is a payable for the customer who owes you.

Say you invoice a client $2,000 for design work and give them 30 days to pay. That $2,000 stays in your accounts receivable until the money lands in your account, at which point it moves from receivable to cash.

Accounts receivable vs accounts payable

Accounts receivable and accounts payable often get mixed up, but they point in opposite directions. This section explains the mirror relationship.

Accounts receivable is money owed to you by your customers. Accounts payable is money you owe to your suppliers.

One business's receivable is another business's payable. When you buy on credit, you create a payable for yourself and a receivable for your supplier.

Accounts receivable on the balance sheet

Accounts receivable shows up in a specific spot on your financial statements. Here's where it lives and how it's recorded.

On your balance sheet, accounts receivable is a current asset. So if you're wondering whether AR is an asset or a liability, it's an asset, because it represents money coming into your business.

Accounts receivable is recorded as a debit when you make the sale, with a matching credit to sales revenue. You usually expect to collect it within a year, which is why it counts as a current asset.

How to measure accounts receivable

Tracking accounts receivable tells you how quickly you turn sales into cash. Two simple measures do most of the work: the accounts receivable turnover ratio and days sales outstanding (DSO).

The accounts receivable turnover ratio shows how many times you collect your average receivables over a period. A higher number means you're collecting what you're owed more often.

To calculate your accounts receivable turnover ratio, follow these steps.

1. Add up your net credit sales for the period, for example $120,000 over a year.
2. Work out your average accounts receivable by adding your opening and closing AR, then dividing by 2, for example $20,000.
3. Divide net credit sales by average accounts receivable: $120,000 divided by $20,000 gives a turnover ratio of 6.

Days sales outstanding turns that ratio into a number of days. Divide 365 by your turnover ratio of 6 and you get about 61 days, which is the average time it takes you to get paid.

How to manage accounts receivable and get paid on time

Managing accounts receivable well keeps cash flowing and cuts down on chasing. The habits below make it easier to get paid on time.

• Set clear payment terms so customers know exactly when and how to pay
• Invoice promptly and accurately, because delays and mistakes give customers a reason to hold off
• Let customers accept online payments so they can settle up in a couple of clicks
• Follow up on overdue invoices with friendly, timely reminders
• Know your options if a customer doesn't pay, from a payment plan to a debt collection service

Late payment is common: companies in Canada turn overdue invoices into cash on average about a month beyond the due date, according to the Atradius Payment Practices Barometer. Small changes to how you invoice and follow up can reduce late payments and steady your cash flow.

Simplify your accounts receivable with Xero

Keeping on top of accounts receivable gets a lot easier when your invoices, reminders, and payments live in one place. Xero tracks which invoices are outstanding, sends automatic reminders, and lets customers pay you online, so you spend less time chasing and more time running your business. See how it works and get one month free.

FAQs on accounts receivable

Here are answers to some frequently asked questions about accounts receivable.

Is accounts receivable an asset or a liability?

Accounts receivable is an asset. It's money your customers owe you, so it adds value to your business rather than being something you owe.

What is the difference between accounts receivable and accounts payable?

Accounts receivable is money owed to you, while accounts payable is money you owe to others. They're the same transaction seen from opposite sides.

How do you calculate the accounts receivable turnover ratio?

Divide your net credit sales by your average accounts receivable for the period. A higher ratio means you're collecting payments more often.

What happens if a customer doesn't pay?

You can send reminders, add late fees if your terms allow, or set up a payment plan. If that doesn't work, you might use a debt collection service or write the amount off as a bad debt.

Related terms

• Invoice
• Trade debtors
• Accounting equation

Learn more about accounts receivable

• What is accounts receivable
• Guide to invoicing
• Managing cash flow