Accounts Receivable, or AR, is the money a business is owed by its customers for goods or services that have been delivered but not yet paid for. In other words, it’s the value of credit sales that a company expects to collect within a set period of time—typically 30, 60, or 90 days. Because the business expects to receive this cash soon, AR is considered as a current asset on the balance sheet, implying short-term liquidity.
AR efficient management ensures timely payment collection, reducing the risk of cash shortages that could disrupt daily operations. Businesses often monitor AR through metrics like the accounts receivable turnover ratio for how quickly outstanding invoices are collected, and aging schedules for how long receivables have been outstanding.Â
Note: A large balance of AR can be risky if customers delay payments or default, potentially leading to bad debts. In order to control such risks and make sure that financial reports are made accurately, companies will often establish credit limits and use allowances for doubtful accounts.
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