Accounts Receivable: Definition, Process and Examples

To run a healthy business, you need a steady stream of cash inflows, and managing accounts receivable is a key part of maintaining strong cash flow and liquidity. Accounts receivable represents the money owed to your business by customers for goods or services already delivered, and it plays an important role in cash flow management and working capital.

In this guide, we’ll explain what accounts receivable meliquans, where it appears on financial statements, and practical ways to improve cash flow.

What is accounts receivable?

Accounts receivable refers to the money a business is owed by customers for goods or services that have been delivered but not yet paid for. In simple terms, it represents credit sales where payment is still outstanding, typically recorded when an invoice is issued rather than when cash is received.

When you sell on credit, you provide the customer with an invoice and allow them to pay at a later date instead of collecting cash at the point of sale. This creates an accounts receivable balance on your financial statements until the payment is received. Accounts receivable is different from accounts payable, which refers to money your business owes to suppliers or vendors.

Accounts receivable vs accounts payable

Accounts receivable and accounts payable are two core components of business cash flow, but they represent opposite sides of a transaction. Understanding the difference between AR and AP is essential for managing working capital and maintaining healthy financial operations.

Is accounts receivable an asset? 

Yes, accounts receivable is considered a current asset because it represents money owed to a business by its customers for goods or services that have already been delivered. Since these payments are typically expected within a year, accounts receivable is recorded as a current asset on the balance sheet.

Balance sheet

A balance sheet presents a company’s financial position at a specific date. It reflects the firm’s assets, liabilities, and equity balances. The components that make up a balance sheet are:

• Assets: What your business owns. Assets are resources used to produce revenue, and accounts receivable is an asset balance.
• Liabilities: What your business owes to other parties. Liabilities include accounts payable and long-term debt.
• Equity: Equity is the difference between assets and liabilities, and you can think of equity as the true value of your business.

All companies should use the accrual basis of accounting to create financial statements.

Accounts receivable example

Businesses may record multiple accounts receivable transactions each week, making it important to have a clear process for tracking outstanding customer payments.

For example, imagine a marketing agency completes a project for a client and issues an invoice for S$2,000 on 25 March with 30-day payment terms. Because the client has not yet paid, the amount is recorded as accounts receivable in the general ledger.

The following journal entry records the sale:

This entry increases accounts receivable because the business is owed money by the customer. At the same time, revenue is recognized because the service has already been delivered. When the customer pays the invoice on 24 April, the business records the following journal entry:

This entry increases cash and removes the outstanding accounts receivable balance from the books - because the customer has now paid in full.

How to find accounts receivable

Accounts receivable is included under current assets on the balance sheet. Current assets are resources a business expects to convert into cash within 12 months, and they typically include:

• Cash: Money the business already has on hand or in the bank
• Accounts receivable: Money owed by customers for goods or services provided on credit
• Inventory: Products held for resale
• Prepaid expenses: Payments made in advance, such as insurance premiums or rent
• Investments: Short-term holdings such as money market funds, stocks, or bonds
• Notes receivable: Money owed to the business under a formal loan agreement due within 12 months

On the other side of the balance sheet, current liabilities include obligations that must be paid within 12 months. This includes accounts payable and any portion of long-term debt due within the year. For example, if a business owes $3,000 in loan repayments (principal and interest) within the next year, that amount is recorded as a current liability.

The difference between current assets and current liabilities is known as working capital. A healthy business should maintain positive working capital, meaning it has enough short-term assets to cover its short-term obligations.

Tracking accounts receivable is an important part of this process, and it is typically reviewed and updated as part of regular monthly accounting tasks.

Tips for improving accounts receivable

Having a clear collections process and sticking to it makes a big difference to cash flow. For example, you might send reminder emails when invoices are 30 days overdue, then follow up with a phone call after 60 days. Some businesses also add late fees to invoices to encourage on-time payment. This can sometimes mean losing customers who consistently pay late, but it often leads to better payment habits overall.

You can also improve cash flow by offering small early payment discounts (like 1%–2% if paid within 10 days) and using automated invoicing and reminders to cut down on admin and delays. It’s also important to keep an eye on overdue invoices and write off any that are unlikely to be paid as bad debt, so your accounts stay accurate.

Document your processes with Intuit 

Every business should have a written procedures manual for its accounting system, and it should clearly include how accounts receivable is handled. This helps make sure routine tasks are done the same way every time, reducing mistakes and keeping processes consistent.

Try a 30 day free trial of Intuit QuickBooks Accounting software to see if we can help keep track of your revenue and expenses.