What Is Accounts Receivable?
Accounts receivable (AR) represents sales a company has made and recognized as revenue but for which cash has not yet arrived. It exists because most business-to-business sales happen on credit terms, such as net 30 or net 60, meaning the customer has 30 or 60 days to pay the invoice.
AR is a direct consequence of accrual accounting: revenue is booked when the product or service is delivered, and the unpaid balance parks on the balance sheet as a receivable until the customer settles up.
How It Works
When a company invoices a customer, it records revenue on the income statement and an equal receivable on the balance sheet; when the cash arrives, the receivable converts to cash with no further income statement impact. Because some customers never pay, companies maintain an allowance for doubtful accounts that reduces AR to its expected collectible value.
Analysts gauge collection speed with days sales outstanding: DSO = (Accounts Receivable / Revenue) x 365. A rising DSO means customers are taking longer to pay, which ties up cash.
Example
A consulting firm bills clients $2 million in a quarter but has collected only $1.5 million by quarter-end, leaving $500,000 in accounts receivable. If annual revenue is $8 million, DSO is ($500,000 / $8,000,000) x 365, or about 23 days, meaning the firm waits roughly three weeks on average to turn a sale into cash.
Why It Matters
Receivables are a key working capital line: when AR grows faster than revenue, it can signal loosening credit standards, struggling customers, or even aggressive revenue recognition. That gap between reported sales and collected cash is one of the first things forensic-minded investors check.
In three-statement interview questions, an increase in accounts receivable reduces operating cash flow even though net income is unchanged, a subtlety candidates are expected to explain.
