How accounts receivable works
Every invoice you issue and the customer has not yet paid is part of accounts receivable. It is money you have earned but not collected. On the balance sheet it is an asset; in your bank account it does not exist yet. When the customer pays, the invoice leaves AR and the cash arrives.
An aging report sorts that money by how late it is: invoices not yet due, then 1 to 30 days past due, 31 to 60, 61 to 90, and over 90. The older an invoice gets, the less likely it is to be paid, so the buckets tell you where to chase first.
Net terms set how big AR can grow. A business that charges cards automatically on the renewal date has almost no receivables; a business that gives customers net 30 or net 60 carries a month or two of billing in AR at any time.
accounts receivable = sum of the unpaid balance of every issued invoice
days sales outstanding (DSO) = accounts receivable ÷ amount invoiced in the period × days in the period
Worked example
On April 30 a made-up business with customers on net 30 terms has $20,000 of unpaid invoices.
- Current, not yet due
- $12,000
- 1 to 30 days past due
- $4,500
- 31 to 60 days past due
- $2,000
- 61 to 90 days past due
- $1,000
- Over 90 days past due
- $500
- Accounts receivable
- $20,000
$8,000 of it, 40%, is past due. The $1,500 over 60 days is where a phone call beats another email.
Why accounts receivable matters
Revenue on paper does not pay salaries. A business can grow its sales and still run short of cash if customers pay slowly, and AR is where that gap shows up.
Watching how AR ages tells you whether collection is working. If the past-due buckets grow faster than sales, customers are paying later, a process is broken, or a few large accounts are in trouble. Catching it early is cheaper than writing invoices off later.
Common mistakes
- Counting AR as cash Receivables are a promise. Plan spending on what has been collected, and treat old receivables with caution.
- No follow-up on overdue invoices An invoice past its due date with no reminder tends to slide further. Remind on a schedule.
- Generous terms by default Every extra day of terms adds to AR. Offer longer terms where a customer's purchasing process needs them, not to everyone.