Accounts receivable
Learn what accounts receivable means, how it works, and how to manage what your customers owe you.
Published Friday 24 July 2026
Table of contents
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.
- It sits on your balance sheet as a current asset, and it isn’t counted as revenue until you’ve earned it.
- Accounts receivable is the mirror image of accounts payable: one is money owed to you, the other is money you owe suppliers.
- Tracking receivables closely helps you protect cash flow, spot late payers early, and keep bad debt to a minimum.
What is accounts receivable?
Accounts receivable is the money owed to you by customers for goods or services you’ve delivered but haven’t been paid for yet. It’s sometimes called receivables, trade debtors, or simply AR.
The easiest way to picture it is a sales invoice a customer hasn’t paid yet. You’ve done the work or shipped the order, and now you’re waiting on the payment.
Accounts receivable and accounts payable record the same transaction from opposite sides. What shows up as a receivable in your books is a payable in your customer’s books.
The term can also describe the person or team who chases those payments. If someone works “in AR”, they’re the ones following up on unpaid invoices.
Why accounts receivable matters
Accounts receivable has a direct effect on the cash you can actually use. Until an invoice is paid, that money is promised rather than in the bank.
When receivables build up, your working capital tightens and it gets harder to cover wages, stock, and everyday bills. Healthy liquidity depends on turning invoices into cash at a steady pace.
Keeping an eye on what you’re owed also makes planning far more realistic. If you build the timing of expected payments into your cash flow forecasting, you can see shortfalls coming and act before they bite.
Accounts receivable vs accounts payable
These terms are easy to mix up, but they point in opposite directions. One tracks money coming in, the other tracks money going out.
Accounts receivable is money owed to you by customers, so it’s recorded as a current asset. Accounts payable is money you owe to suppliers, so it’s recorded as a current liability.
Both need attention to keep cash flowing smoothly. If you want to see the other side in more detail, read our guide to the accounts payable process.
Is accounts receivable an asset or revenue?
Accounts receivable is an asset, not revenue. It appears on your balance sheet as a current asset because you expect to collect it within a year.
Revenue is earned when you deliver the goods or service, and that’s when you recognise the sale. The receivable simply records that the payment is still outstanding.
How you time this depends on your method of bookkeeping, which our guide to cash vs accrual accounting explains in plain terms. Under accrual accounting you record the sale when it’s earned, so the receivable and the revenue are logged before the cash arrives.
The accounts receivable process
The accounts receivable process is the routine you follow from agreeing a sale to collecting the cash. Setting it up as clear, repeatable steps keeps invoices from slipping through the cracks.
- Run a credit check, so you know a new customer is likely to pay on time.
- Deliver the goods or services you’ve agreed to provide.
- Issue an accurate invoice with clear payment terms and a due date.
- Record the receivable in your books as money owed to you.
- Collect the payment, sending reminders as the due date approaches.
- Reconcile the payment against the invoice and report on what’s still outstanding.
Accounts receivable payment terms
Payment terms set out how long a customer has to pay and any conditions attached. They shape when the cash actually reaches your account.
Common terms include net 30 and net 60, meaning payment is due within 30 or 60 days of the invoice date. Shorter terms bring cash in sooner, while longer terms can help you win larger customers.
Some businesses offer an early-payment discount, written as 2/10 net 30. That means the customer can take 2% off if they pay within 10 days, otherwise the full amount is due in 30 days. Clear terms are one of the simplest ways to reduce payment delays.
Accounts receivable turnover ratio and DSO
The turnover ratio and DSO both tell you how well you’re collecting what you’re owed. Both use figures you already track in your books.
The accounts receivable turnover ratio is net credit sales divided by average accounts receivable. A higher ratio means you’re collecting invoices quickly and turning sales into cash efficiently.
Days sales outstanding (DSO) is the average number of days it takes to collect payment after a sale. A lower DSO means customers are paying sooner, which is good news for your cash flow.
Managing overdue accounts and bad debt
Overdue invoices are a normal part of running a business, but they need a steady, organised response. The sooner you act, the more likely you are to get paid.
Send friendly reminders before and after the due date, and agree clear terms up front so expectations are set from the start. Our guide to chasing outstanding invoices walks through a practical follow-up routine you can reuse.
If an invoice stays unpaid despite repeated follow-ups, you may eventually write it off as bad debt. Treat that as a last resort, after you’ve exhausted your reminders and payment options.
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FAQs on accounts receivable
Here are answers to some frequently asked questions about accounts receivable to round out the detail above.
Is accounts receivable an asset or a liability?
Accounts receivable is an asset, because it represents money customers owe you. It’s classed as a current asset since you expect to collect it within a year.
Is accounts receivable the same as revenue?
No, they’re recorded separately. Revenue is the income you’ve earned, while accounts receivable is the portion of that income you’re still waiting to be paid.
What is another name for accounts receivable?
It’s also known as receivables, trade debtors, or AR. Some accounting systems label the outstanding balance as your debtors ledger.
What is the difference between accounts receivable and accounts payable?
Accounts receivable is money owed to you by customers, so it’s an asset. Accounts payable is money you owe to suppliers, so it’s a liability.
How do you calculate the accounts receivable turnover ratio?
Divide your net credit sales by your average accounts receivable for the period. The result shows how many times you collect your average receivables balance over that time.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.