Accounts receivable (AR) is the money customers owe a business for goods or services already delivered but not yet paid for. It arises whenever a sale is made on credit rather than for immediate cash, and it sits on the balance sheet until the customer pays.
Yes. Accounts receivable is recorded as a current asset on the balance sheet, because it represents a legally enforceable claim to cash the business expects to collect, usually within the normal payment terms of 30 to 90 days.
It is classified as current when collection is expected within twelve months, which covers nearly all trade receivables. Amounts not expected within a year, such as long-term instalment agreements, are shown separately as non-current.
The balance is reported net of an allowance for doubtful accounts, an estimate of the portion unlikely to be collected. Gross receivables minus that allowance gives net realizable value, which is the figure that actually appears on the balance sheet.
They are mirror images of the same transaction seen from opposite sides. One company's receivable is another company's payable.
EXAMPLE
A distributor sells $9,000 of product to a retailer on net 30 terms. The distributor books $9,000 in accounts receivable. The retailer books the same $9,000 in accounts payable. One invoice, two ledgers, opposite signs.
The gap between how fast a business collects and how slowly it pays is what determines whether it funds its own operations or is funded by its suppliers, which is the core of the cash conversion cycle.
The AR turnover ratio measures how many times a business collects its average receivables balance during a period. It is the standard measure of collection efficiency.
FORMULA
Accounts Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable
EXAMPLE
A business with $2,400,000 in annual credit sales and an average receivables balance of $300,000 has a turnover of 8. It collects its receivables eight times a year, roughly every 45 days.
A higher ratio generally means faster collection and tighter credit control. A ratio falling over time signals either loosening credit terms, deteriorating customer quality, or a collections process that has stopped being followed. The number is only meaningful against the business's own trend and its industry, since payment norms differ substantially between sectors.
Days sales outstanding (DSO) converts the same relationship into a number of days, which most finance teams find more intuitive to report.
FORMULA
Days Sales Outstanding = (Accounts Receivable ÷ Net Credit Sales) × Days in Period
DSO and AR turnover measure identical behavior. Turnover answers how many times receivables cycled; DSO answers how long a sale takes to become cash. Dividing 365 by the turnover ratio gives DSO directly.
DSO is one of three inputs to the cash conversion cycle, alongside days inventory outstanding and days payable outstanding. Reducing DSO shortens the cycle and releases working capital without changing prices or supplier terms.
EXAMPLE
A $9,000 sale on credit: debit Accounts Receivable $9,000, credit Revenue $9,000. Thirty days later the customer pays: debit Cash $9,000, credit Accounts Receivable $9,000. Revenue was recognized on day one; cash arrived on day thirty.
Businesses waiting on receivables sometimes convert them to cash early through third-party finance. Two arrangements dominate, and the difference matters legally.
Both cost meaningfully more than conventional borrowing, because the provider is pricing the credit risk of customers it did not underwrite. They are cash-flow instruments rather than efficiency measures: a business collecting slowly because of process problems will usually gain more from fixing collections than from financing the delay.
