Accounts receivable: All you need to know

Managing accounts receivable (AR) is a core part of keeping your business financially healthy. Whether you’re a growing company or an established one, knowing how to handle incoming payments, track customer invoices, and streamline collections can have a real impact on your cash flow. Let’s break down everything you need to know about accounts receivable from the basics to best practices.

What is accounts receivable?

Accounts receivable, by definition, refers to the money owed to your business by customers for goods or services that have already been delivered. When you send an invoice and wait for payment, that balance becomes an account receivable.

In accounting terms, accounts receivable is part of your company’s balance sheet. It represents a legal obligation from your customer to pay within a set time period — usually 30, 60, or 90 days, depending on your terms.

Is accounts receivable an asset?

Yes, accounts receivable is an asset. More specifically, it’s a current asset, because the money is expected to be received within a year. Having a large amount in receivables can be a sign of strong sales, but it can also signal a problem if those payments are delayed or never collected.

Is accounts receivable a debit or credit?

A debit increases assets and expenses, while a credit increases liabilities, equity, and revenue. Since accounts receivable is an asset, it’s recorded as a debit.

What is the accounts receivable turnover ratio?

The AR turnover ratio shows how efficiently your business collects payments from customers. It tells you how many times, on average, you’ve collected your outstanding receivables during a specific period.

How to calculate accounts receivable turnover

The AR turnover formula is:

Net Credit Sales ÷ Average Accounts Receivable

If you had $1,000,000 in credit sales for the year and an average accounts receivable balance of $200,000, your turnover ratio would be 5. This means you collected your average receivables five times during the year.

What is accounts receivable factoring?

Accounts receivable factoring is when a business sells its outstanding invoices to a third party (called a factor) at a discount. It’s a way to get immediate cash rather than waiting for customers to pay. Factoring can be helpful for managing cash flow, but it comes at a cost — typically a percentage of the invoice value.

What is accounts receivable insurance?

Accounts receivable insurance protects businesses from losses when customers fail to pay their invoices. It can be especially useful when working with new clients or expanding into new markets. The insurance typically covers a portion of the unpaid receivable, reducing the financial risk.

Accounts payable vs. accounts receivable: What’s the difference?

The difference between AP and AR comes down to the direction of money.

• Accounts receivable is money owed to your business by customers.
• Accounts payable is money your business owes to suppliers or vendors.

Both are part of your working capital, but they play opposite roles. Managing both carefully is key to healthy cash flow.

Accounts receivable examples

Here are a few AR examples to make the concept clearer:

• You run a design agency and invoice a client $5,000 for a website. That $5,000 is added to accounts receivable until the client pays.

• A wholesale distributor ships goods to a retailer on net-30 terms. The invoice amount sits in accounts receivable until payment is received after 30 days.

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Accounts receivable management best practices

Effective accounts receivable management ensures that money comes in on time, keeps your books clean, and reduces the risk of bad debt. Here are a few ways to improve how you manage receivables:

1. AR software and how it can help you

Using accounts receivable software can streamline the entire invoicing and collection process. These tools track customer balances, send automated reminders, and generate reports that help you identify trends and slow-paying clients. Many solutions integrate with your accounting or ERP system, reducing manual work.

2. AR automation

Accounts receivable automation takes things a step further by handling repetitive tasks automatically — things like sending invoices, reconciling payments, or flagging overdue accounts. Automation reduces errors, speeds up collection cycles, and improves accuracy across the board.

3. AR outsourcing

If your internal team is stretched thin, outsourcing accounts receivable might be a good fit. Third-party AR specialists can manage billing, collections, and reporting on your behalf. Outsourcing may also improve collection rates if you don’t have a dedicated in-house function.

Accounts receivable best practices

Here’s a quick checklist of AR best practices to help you stay on top of your receivables:

• Set clear payment terms: Be upfront about due dates and penalties for late payments.
• Invoice promptly: The sooner you bill, the sooner you get paid.
• Use digital tools: AR software and automation save time and improve accuracy.
• Follow up consistently: Don’t let invoices sit unpaid. Follow up with reminders.
• Know your customers: Run credit checks and set appropriate credit limits.
• Offer multiple payment options: Make it easy for customers to pay.
• Track key metrics: Monitor your accounts receivable turnover ratio to catch issues early.

Whether you’re just starting to build out your receivables process or looking to improve how you collect payments, strong AR practices can help keep your cash flow steady and your customer relationships solid. Investing in tools like AR software or automation, and having clear internal processes, makes it easier to scale and avoid common pitfalls.

For more insights and updates on corporate payments, check out:

• Your guide to virtual card rebates
• 2025 payment trends
• Accounts payables: Terms you need to know

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The information in this blog post is for educational purposes only. It is not legal, tax or investment advice. For legal, tax or investment advice, you should consult your own legal counsel, tax, and investment advisers.