Accounts receivable (AR) is the money customers owe a business for sales it has made but hasn’t yet been paid for. AR is an important part of businesses’ short-term assets: it affects their cash flow, their ability to meet financial goals, and how outside investors see the health of their business. In the 4th quarter of 2024, invoices for US companies across various industries took a median calculation of 37.46 days to be paid.

AR that sits on the books for a long time can become a liability. Knowing exactly how AR fits into your balance sheet can give you better insight into your business’s financial picture. Below, we’ll explain where AR fits on your balance sheet, how to keep track of it for your financial statements, and what to do when it isn’t collectible.

What’s in this article?

• What is accounts receivable?
  
• Where accounts receivable fits on your balance sheet
  
• How to keep track of accounts receivable for your statements
  
• How to use accounts receivable aging reports to manage payments
  
• What to do when accounts receivable isn’t collectible
  
• Why accounts receivable matters for financial ratios and business metrics
  

What is accounts receivable?

Accounts receivable is the money a customer owes to a business for goods or services that have been delivered but not yet paid for. It’s the credit that a business has extended to clients and expects payment for within a specified period. AR usually appears in the form of outstanding invoices.

Where accounts receivable fits on your balance sheet

Accounts receivable sits under current assets on a company’s balance sheet, and it represents money the company expects to collect soon for goods or services that have already been fulfilled. Businesses typically set payment terms of 30, 60, or 90 days for AR.

How to keep track of accounts receivable for your statements

Closely monitor your AR so you can log it into your accounting records and financial statements, giving you an accurate reflection of the money your business is owed. Here’s how:

• Each time you make a sale on credit, record it as an AR entry in your accounting system as soon as you invoice a client. Credit your revenue account and debit your AR account with the amount owed.
  
• Use an AR aging report to organize receivables by how long invoices have been unpaid (e.g., 0–30 days, 31–60 days, 61–90 days). This quickly shows which customers might need follow-ups.
  
• Reconcile AR on a monthly or weekly basis for accuracy. Compare the AR ledger against outstanding invoices to ensure everything aligns and address any discrepancies.
  
• As soon as customers make payments, apply these directly to the corresponding invoices in your system. This decreases the AR balance and increases cash on hand.
  
• Track AR turnover—which is how many times AR is collected over a period—and days sales outstanding (DSO), which is the average number of days it takes to collect on invoices. These metrics indicate how well your credit and collection practices are working.
  
• Display AR in the current assets section on the balance sheet for a glimpse of the total outstanding customer balances at a given time. This view can provide insight into overall liquidity, and it can confirm whether you’re in a solid position to cover any short-term commitments.
  
• Include AR aging trends in financial analysis to evaluate the effectiveness of your credit policies and spot patterns in customer payment behavior. If you notice AR or the number of overdue invoices is rising, it might be time to tighten credit terms or follow up with specific accounts.
  

How to use accounts receivable aging reports to manage payments

Using AR aging reports can be one of the most effective ways to manage payments. Here’s how to use these reports:

Organize outstanding invoices by age

An AR aging report organizes all unpaid invoices by how long they’ve been outstanding. This layout makes it easy to see which customers are on track to pay and which invoices need attention at a glance.

Identify trends and patterns in customer payments

Reviewing your aging report regularly can reveal trends in customer payment habits. For instance, if you notice certain customers consistently fall into the “61–90 days overdue” category, it might be a sign to reevaluate their credit terms or discuss payment expectations with them.

Prioritize collections based on aging segments

With aging reports, you can prioritize older invoices for follow-ups, since these are further past due and more likely to slip into nonpayment. This targeted approach can increase your chances of collecting older balances and reduce bad debts (i.e., invoices that become uncollectible).

Set up automated reminders and alerts

Many accounting systems allow you to implement automated reminders and alerts for invoices as they age. Automation helps maintain consistent communication and keeps payment at the forefront of customers’ minds, without requiring constant, manual follow-ups. You could schedule reminders to go out to customers when their invoices are overdue by a certain number of days (e.g., 30 days, 60 days).

Use the report to forecast cash flow

The aging report can give you a realistic estimate of when cash might come in based on due dates and customer payment habits. By analyzing the report, you can better predict incoming funds and adjust your financial planning accordingly.

Analyze the report to refine credit policies

Aging reports show how well your credit policies align with customer behavior. If you consistently see invoices aging beyond the expected terms, it might be time to revise your credit policies. This could mean adjusting payment terms, limiting credit for certain customers, or requiring deposits up front.

Include aging report insights in monthly reviews

Incorporating AR aging insights into regular financial reviews can help you stay proactive with collections. It also can keep everyone in your business—from finance to sales—aligned on the health of receivables. If certain accounts age into overdue categories consistently, the team can work together to decide on further steps such as renegotiating terms, sending escalated reminders, or potentially suspending credit until balances are paid down.

What to do when accounts receivable isn’t collectible

Accounts receivable doesn’t always turn into cash. When an AR entry becomes uncollectible, here’s how to handle it:

• Confirm it’s uncollectible: First, verify whether the debt truly can’t be collected. Try contacting the customer or using a collection service to check whether there’s any chance of payment.
  
• Write it off: Once you’re sure the customer won’t pay the debt, write it off your books. Create an entry that shifts the balance from AR to a bad debt expense account on your income statement. This way, it appears as a loss for the period.
  
• Set up an allowance for doubtful accounts: To prepare for future bad debts, you could create an “allowance for doubtful accounts.” This reserve estimates potential losses from uncollected invoices each period, so you’re not caught off guard if payments fall through.
  
• Review and adjust credit policies: Examine why the debt went unpaid. This could be a good time to tighten up credit policies, set stricter terms, or improve how you assess customers’ creditworthiness to prevent similar issues in the future.
  
• Look into tax deductions: In some cases, you might be able to claim bad debts as a tax deduction, which can help offset the loss. A tax adviser can help you handle this correctly.
  

Why accounts receivable matters for financial ratios and business metrics

Accounts receivable is a big part of many important financial ratios and metrics that give insight into a company’s health and performance. Here are some of those financial figures:

• Liquidity ratios: AR is part of current assets, so it directly affects liquidity ratios such as the current ratio and quick ratio. These measure your ability to meet short-term financial obligations. Higher AR can improve these ratios. But if AR is too high due to unpaid invoices, it might indicate liquidity issues.
  
• Cash flow: AR is cash you expect to receive soon, so it can be a good gauge of cash flow in the near future. A large or increasing AR balance might mean more money coming in soon—or it could signal trouble if payments are overdue and collections are lagging behind.
  
• AR turnover ratio: The AR turnover ratio measures how often AR is collected over a period, typically a year. You can calculate it by dividing net credit sales by average AR. A higher turnover ratio generally means you’re collecting efficiently, while a lower one might suggest issues with collections or customer payment habits.
  
• DSO: DSO tells you how long it takes on average to collect on an invoice. You can calculate it by dividing AR by net credit sales and multiplying by the number of days in the period. A lower DSO is a good sign that you’re collecting quickly, while a higher DSO suggests you might need to tighten credit terms or improve collections.
  
• Profitability metrics: Delays in AR collection can affect profitability metrics such as net income. This is because a high AR from unpaid invoices can tie up cash that could be used for other growth activities. The quicker you turn AR into cash, the more you can reinvest in operations or pay down debt, which ultimately supports higher profitability.