Glossary
Accounts receivable
Money customers owe a company for sales already made on credit; a current asset on the balance sheet.
On this page
Accounts receivable (AR) is the money a company has earned from customers but not yet collected, because it delivered goods or services and let the customer pay later. Receivables are reported as a current asset since they are expected to turn into cash within a year, typically within 30 to 90 days.
How it works
Under accrual accounting, a sale on credit is booked as revenue right away and an equal amount is added to receivables. When the customer pays, receivables fall and cash rises; revenue is not touched again. Companies also hold an allowance for doubtful accounts, an estimate of receivables that will never be collected, and report AR net of it.
The standard way to gauge collection speed is days sales outstanding:
Why investors watch it
Receivables growing much faster than revenue is a classic warning sign. It can mean customers are struggling to pay, that the company loosened credit terms to win sales, or, in the worst cases, that revenue was recognized aggressively. Because a rise in AR is subtracted when computing operating cash flow, such a company often shows healthy net income alongside weak cash generation, a gap worth investigating in the cash flow statement.
Businesses that sell to consumers for cash, like restaurants, carry little AR; those selling to other businesses or governments usually carry a lot.