What is Accounts Receivable?
Accounts receivable (AR) is the money customers owe a business for goods or services already delivered on credit. It's a current asset on the balance sheet and a key indicator of how efficiently a company collects cash from its customers.
Accounts receivable is the total amount customers owe a company for credit sales that haven't yet been paid in cash; it's tracked as a current asset until collected.
- 1↓Credit Sale MadeGoods/services delivered to a customer who agrees to pay later.
- 2↓Invoice IssuedAn invoice records the amount owed and the payment due date.
- 3↓AR RecordedThe sale is booked as a debit to Accounts Receivable and a credit to Revenue.
- 4Cash CollectedWhen payment arrives, debit Cash and credit Accounts Receivable to close it out.
Try it: interactive calculator
Step-by-step worked examples
A company has net credit sales of $600,000 and average accounts receivable of $75,000. Find the AR turnover ratio.
AR Turnover = Net Credit Sales / Average AR AR Turnover = 600,000 / 75,000 AR Turnover = 8 times per year
Using the AR turnover ratio of 8 from Example 1, find the Days Sales Outstanding (DSO).
DSO = 365 / AR Turnover DSO = 365 / 8 DSO ≈ 45.6 days — customers take about 46 days to pay on average.
Beginning AR was $50,000 and ending AR was $70,000. Net credit sales for the year were $480,000. Find the AR turnover ratio.
Average AR = (50,000 + 70,000) / 2 = 60,000 AR Turnover = 480,000 / 60,000 AR Turnover = 8 times per year
Flashcards
Quick quiz
Q1.Net credit sales are $400,000 and average AR is $50,000. What's the AR turnover ratio?
Q2.What does accounts receivable represent?
Q3.An AR turnover ratio of 12 means, on average, how many days to collect (DSO)?
Q4.If AR turnover drops sharply year over year, what does it suggest?
The full card deck, worked steps and AI-tutor support for “What is Accounts Receivable?” are in Notek — study by hand before your exam.
Common mistakes
Using ending AR alone instead of average AR in the turnover formula. — Correct: Use average AR = (beginning + ending) ÷ 2 to smooth out seasonal swings.
Using total sales instead of net credit sales. — Correct: Only credit sales belong in the numerator — cash sales never create a receivable.
Assuming accounts receivable is the same as cash. — Correct: AR is money owed, not yet collected — it's a separate current asset from cash.
Ignoring a rising AR turnover as always good. — Correct: Extremely high turnover could also mean overly strict credit terms that are hurting sales.
FAQ
What is the formula for accounts receivable turnover?
AR Turnover = Net Credit Sales ÷ Average Accounts Receivable.
What are examples of accounts receivable?
An unpaid customer invoice for a delivered product, or a client balance owed after a service was performed on credit.
How do you calculate accounts receivable turnover?
Divide net credit sales for the period by the average accounts receivable ((beginning + ending) ÷ 2).
Why does accounts receivable matter?
It shows how much cash is tied up in unpaid customer balances and how efficiently a company converts sales into cash.