That gap between when you earn revenue and when cash arrives is exactly why accounts receivable matters. Get it right, and you protect cash flow, reduce stress, and give your team breathing room to grow.
At its core, accounts receivable is the money customers owe you for goods or services you already provided on credit. Under accrual accounting, you record the receivable when you deliver, not when money hits the bank.
You debit Accounts Receivable and credit Revenue, then you estimate an allowance for doubtful accounts so your balance sheet shows net receivables, not an overly optimistic number.
Journal entry at delivery Debit: Accounts Receivable Credit: Revenue Then estimate and record an allowance so you present net receivables.
Receivables sit in current assets because you expect to collect within twelve months. They feed directly into working capital and your cash conversion cycle, so speed and quality of collection matter more than the dollar figure alone. That is why you track days sales outstanding, the accounts receivable turnover ratio, and an aging schedule that flags slow payers before they become write offs.
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Key Takeaways
- Accounts receivable equals money owed to you, recorded when you deliver, and presented as a current asset on the balance sheet.
- Record at delivery, debit Accounts Receivable, credit Revenue, then present net of an allowance for doubtful accounts.
- Liquidity depends on speed, so track DSO and AR turnover to see how quickly sales become cash.
- Use an aging schedule to focus outreach, tighten credit where risk rises, and adjust the allowance when 61–90 and over 90 day buckets grow.
- Consider terms like 2/10, net 30 and, when needed, receivables financing to smooth timing, while weighing cost against flexibility.
What Accounts Receivable Means and Why It Matters
Think of accounts receivable as your near term pipeline of cash. The faster you turn that pipeline, the healthier your working capital. The headline metrics are simple and powerful.
- Accounts receivable turnover equals net credit sales divided by average accounts receivable. Higher is better, since it means you collect more frequently.
- Days sales outstanding, DSO approximates how many days on average it takes to collect a sale. A practical formula is average accounts receivable divided by net credit sales, multiplied by the number of days in the period.
Here is a quick example so the math feels real. Imagine net credit sales of 600,000 for the quarter, average AR of 150,000, and a 90 day quarter. Turnover equals 600,000 divided by 150,000 which is 4.0 times.
DSO equals 150,000 divided by 600,000 times 90 which is 22.5 days. If your terms are net 30, a DSO near 23 days is a healthy sign. If DSO drifts toward 40 or 50, you have cash hiding in plain sight.
The allowance for doubtful accounts protects you from overstating assets and earnings. You estimate expected credit losses based on recent experience and the pattern you see in your aging buckets. When late balances rise, you increase the allowance, and you tighten credit policies for new orders until collections improve. This is not pessimism, it is disciplined reporting that keeps your balance sheet honest.
A practical aging schedule groups invoices by days outstanding. The common buckets are Current, 1–30, 31–60, 61–90, and over 90. The moment a balance jumps a bucket, you change your approach. A friendly reminder fits at 1–30 days. A firm call with a specific payment plan belongs in 61–90.
Over 90 deserves an escalation path that may include a hold on future work, late fees where your contract allows, and a plan for write off if collection becomes unlikely.
Accountably’s readership includes CPA firm owners, EAs, and in house accounting leaders who live this every month. If your team is stretched thin and collections slip, a consistent process makes a visible difference. You do not need heroic effort, you need cadence, clarity, and the right people following the same playbook.
Focus on the three levers you control
- Clear terms up front,
- Fast, accurate invoicing,
- Consistent follow up based on the aging schedule.
In short, receivables tell the story of how well your revenue becomes cash. When DSO trends down and turnover trends up, working capital improves, stress drops, and you unlock options to invest, hire, or simply sleep better. When those metrics worsen, your aging schedule will show you where to act first.
How Accounts Receivable Is Recorded and Managed
Clean accounting starts the moment you deliver. Under accrual accounting you recognize revenue and the receivable at delivery, not at collection. You debit Accounts Receivable and credit Revenue, then you post the invoice to the AR subledger so every balance ties back to a customer and an invoice number. At month end you reconcile the subledger to the general ledger control account. If they do not match, you stop and fix the gap before closing.
Fast path to clean AR Record at delivery, post to subledger, reconcile monthly, adjust the allowance, then close.
You also estimate expected credit losses so your balance sheet shows what you will likely collect. Many teams use an aging based approach that applies higher loss rates to older buckets, for example a small percentage on Current and a higher percentage on over 90 days. Document the method, apply it consistently, and update rates when your experience changes. When collection becomes unlikely, write off the invoice to bad debt expense and keep your net receivables honest.
Cash application is where speed shows up. Match remittances to invoices quickly so open balances fall and disputes surface early. Encourage customers to include invoice numbers on payments. Use payment methods that include remittance data, such as ACH with addenda. Create a simple playbook for unapplied cash so money does not linger in suspense.
Accuracy comes from small habits that compound.
- Send invoices the same day you deliver, with clear terms and the right contact.
- Use a shared inbox for AR so requests never get stuck in a personal mailbox.
- Keep a dispute log with reasons and resolution dates.
- Review credit limits every quarter, raise or lower them based on payment behavior.
Build a Practical AR Playbook
A consistent playbook turns good intentions into results.
- Credit approval, define checks for new customers, set limits, assign terms.
- Invoicing, standardize templates, list purchase order, service dates, and tax.
- Reminders, set a schedule, for example day 3, day 15, day 30, day 45, day 60.
- Escalation, when an account hits 61–90 days, require a call and a payment plan.
- Holds, pause new work for over 90 day balances unless leadership approves.
- Write offs, set a threshold and approval chain so you act, not delay.
If your internal team is swamped during busy season, a specialized back office team can handle invoicing, cash application, reconciliations, and aging follow up under your controls. Accountably provides trained offshore AR support for CPA firms, EAs, and in house accounting teams that need coverage without sacrificing compliance.
Tools and Templates That Help
You do not need a big system to run a tight process. Most teams get far with common accounting platforms plus a few simple templates.
- Accounting systems, QuickBooks Online, Xero, Sage Intacct, or NetSuite for subledger and reports.
- Dunning automation, email reminders that pull invoice data into clear messages.
- Payment links, card or ACH options on the invoice to reduce friction.
- Aging and call list, a weekly export sorted by highest balance and longest age.
- Documentation, a shared folder with signed contracts, POs, and change orders.
A basic aging layout keeps everyone focused.
| Aging Bucket | Balance | % of Total | Target Action |
| Current | Email confirmation of receipt | ||
| 1–30 days | Friendly reminder and payment link | ||
| 31–60 days | Call, confirm payment date | ||
| 61–90 days | Call, escalate to manager, payment plan | ||
| Over 90 days | Hold further work, final notice, evaluate write off |
Accounts Receivable vs Accounts Payable
AR brings cash in, AP sends cash out. You need both running on a schedule that matches your business rhythm.
| Item | Accounts Receivable (AR) | Accounts Payable (AP) |
| Financial statement spot | Current asset | Current liability |
| Trigger | You invoice after delivering goods or services | You receive goods or services before paying |
| Owner | AR specialist, billing team, or controller | AP specialist or procurement and accounting |
| Key reports | Aging schedule, DSO, AR turnover | AP aging, DPO, payment forecast |
| Risks | Bad debts, disputes, slow follow up | Late fees, strained vendor relations, missed discounts |
| Levers | Terms, reminders, credit limits, cash application | Payment runs, terms, discounts, approval workflow |
How AR and AP Shape the Cash Conversion Cycle
Think of your cash conversion cycle as three parts. Inventory days, if you carry stock. DSO, how long customers take to pay. DPO, how long you take to pay suppliers. Shorter DSO and longer but respectful DPO usually improve working capital. For service firms without inventory, the cycle is mostly DSO minus DPO. If you collect in 25 days and pay in 30, you often stay cash positive, which reduces strain on your line of credit.
Balance the system Pull cash in faster with strong AR, push cash out thoughtfully with organized AP, and your month end feels calm, not chaotic.
When you tune both sides together, your forecast becomes dependable. That makes hiring, pricing, and investment decisions a lot easier. If you need extra hands to run both processes during peak months, Accountably can supply trained staff who follow your policies and audit trail, so quality stays high while your team focuses on client work.
Key Metrics, Turnover, DSO, and Aging Schedules
Metrics turn a long invoice list into a clear picture. Start with two ratios and one report.
- Accounts receivable turnover equals net credit sales divided by average AR. Higher means faster collection.
- Days sales outstanding equals average AR divided by net credit sales, multiplied by days in the period. Lower means faster cash.
- The aging schedule shows where balances sit by time bucket so you can act in order.
Set Targets and Alerts
Pick targets that match your terms and your customers’ habits. If most clients have net 30 terms, aim for a DSO only a few days lower than 30, for example 25 to 28 days. That gives you a cushion for weekends and holidays. Create alerts when DSO rises for two months in a row or when the 61–90 bucket crosses a set threshold, for example 10 percent of total AR. Tie leadership attention to those alerts so everyone treats them as real priorities.
Read Trends, Not Just Snapshots
A single month can mislead. Track a rolling three month view of DSO and turnover. If DSO is flat but the over 90 bucket is growing, you may have a few large problem accounts hiding in the average. If turnover improves but cash application is lagging, you may be posting credits late rather than collecting faster. Use the aging to confirm the story the ratios tell.
Examples, Payment Terms, and Common Issues
Examples make this concrete.
- A wholesaler ships a 25,000 order on April 2 with net 30 terms. The invoice posts that day. If cash arrives on May 1, the DSO impact is about 29 days, right in line with terms.
- A consulting firm finishes a project and invoices 12,000 on June 15 with net 15 terms. A polite reminder on June 20 helps, a call on July 2 sets a payment date, and a hold on new work applies if payment slips beyond July 15.
- A utility bills monthly. Because service is continuous, invoicing cadence is the key driver of DSO. Shorter cycles and auto pay reduce aging instantly.
Payment terms are a steering wheel you can turn. Net 30 and net 45 are common for B2B. Early pay discounts such as 2/10, net 30 can accelerate cash, but they come at a cost. A 2 percent discount for paying 20 days early is meaningful. Run the math, then test with a small group of customers and watch whether your DSO improves enough to outweigh the discount.
Common issues show up everywhere and they all have fixes.
- Disputes, send clear SOWs, get signatures, and log issues by reason code.
- Short pays, trace to credits or pricing differences, then adjust your invoice template to prevent repeats.
- Unapplied cash, review daily, ask for remittance advice, and create rules in your bank feed.
- Recurring billing errors, automate schedules, then run a quick monthly audit of quantities and rates.
- Tax questions, keep exemption certificates on file and validate tax jurisdictions before billing.
- Data entry mistakes, protect your process with maker and checker controls so one person enters and another reviews.
When liquidity is tight, receivables financing can bridge timing. Options include factoring specific invoices or using an AR secured line. Always compare the cost to the benefit and keep your controls in place. Financing buys time, but strong processes lower the need for it.
If you want experienced hands to run this playbook while your team focuses on high value work, Accountably can staff AR specialists who follow your controls, work inside your systems, and keep a clean audit trail. That support is most useful during busy seasons or when you scale quickly and need consistent follow up without adding full time headcount.
Frequently Asked Questions
What is accounts receivable in simple words?
It is the money customers owe you after you deliver goods or services on credit. You record it at delivery, then you collect it through reminders, calls, and clear terms until the cash arrives and the invoice closes.
What is the difference between accounts receivable and accounts payable?
AR is cash owed to you and sits as a current asset. AP is cash you owe to vendors and sits as a current liability. You monitor AR with DSO, turnover, and an aging schedule, and you manage AP with payment runs, DPO, and vendor terms.
What is an example of an account receivable?
You invoice a client 5,000 for a completed service. Until the client pays, that 5,000 is a trade receivable. You might also carry credit memos, notes receivable, or installments, each tracked and aged like any other invoice.
Is accounts receivable an asset or a liability?
It is an asset because it represents a claim to future cash. You protect its value with a realistic allowance for doubtful accounts, consistent follow up, and accurate write offs when collection is no longer likely.
Conclusion
Accounts receivable is more than a ledger balance, it is your cash flow in motion. When you send accurate invoices quickly, follow a steady reminder cadence, and act on the aging schedule, you lower DSO, raise turnover, and free up working capital. Keep your allowance current so the balance sheet tells the truth, and escalate early on problem accounts. If capacity is your roadblock, Accountably can provide trained AR analysts who plug into your tools, keep your audit trail clean, and support your team while you grow.
