Accounts Receivable (AR)
Quick Definition
Money owed to a company by its customers for goods or services delivered on credit, recorded as a current asset on the balance sheet.
Key Takeaways
- AR represents money customers owe for products/services delivered on credit
- It is a current asset but not actual cash until collected
- AR growing faster than revenue is a classic earnings quality red flag
- Days Sales Outstanding (DSO) measures how quickly the company collects payments
What Is Accounts Receivable (AR)?
Accounts Receivable (AR) represents the outstanding invoices a company has — money owed by customers who have received goods or services but have not yet paid. Recorded as a current asset on the balance sheet, AR is a key indicator of a company's revenue quality and collection efficiency. While revenue is recorded when a sale is made (accrual accounting), the cash isn't received until the customer pays, which can be 30, 60, or 90+ days later. From a fundamental analysis perspective, AR trends are crucial for assessing earnings quality. Rapidly growing AR relative to revenue can be a red flag — it may indicate the company is booking revenue aggressively through lenient credit terms, channel stuffing, or extending credit to less creditworthy customers. The accounts receivable turnover ratio (Revenue ÷ Average AR) and Days Sales Outstanding (DSO = 365 ÷ AR Turnover) measure collection efficiency. Lower DSO means faster cash collection. Analysts also examine the allowance for doubtful accounts as a percentage of total AR to gauge potential bad debt risk.
Accounts Receivable (AR) Example
- 1If a company reports $100M in quarterly revenue but AR grows from $30M to $50M, only $80M was actually collected as cash — a potential warning sign.
- 2A software company with DSO of 35 days collects payment much faster than an industrial supplier with DSO of 75 days, resulting in better cash flow predictability.
Related Terms
Accounts Payable (AP)
Money a company owes to suppliers and vendors for goods or services received but not yet paid for, recorded as a current liability on the balance sheet.
Days Sales Outstanding (DSO)
The average number of days it takes a company to collect payment after a sale, measuring accounts receivable efficiency.
Working Capital
The difference between a company's current assets and current liabilities, measuring short-term financial health and operational efficiency.
Revenue
The total amount of money a company earns from its business activities before any expenses are deducted, also called sales or top line.
Cash Conversion Cycle (CCC)
The number of days it takes a company to convert its investments in inventory and other resources into cash from sales.
EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization)
A widely used profitability metric that strips out financing, tax, and non-cash capital costs to approximate operating cash generation.
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