Accounts receivable (AR) is the total amount customers owe you for products or services you've already delivered but haven't been paid for yet. It sits on your balance sheet as a current asset, because you expect to collect it within a year.
Xero calls it a short-term IOU from your customers, and says you'll usually collect it much sooner than a year. Shopify adds a detail most definitions skip: AR only records amounts with a due date inside one calendar year. Its example is a five-year contract paid annually, where only the payment due in the next twelve months shows as a receivable on the balance sheet. The dollar figures on this page are the sources' own examples, as of October 2026.
How a sale turns into a receivable
Shopify places AR inside accrual accounting, where income is recorded when the transaction happens, not when the cash lands. The sequence looks like this:
- A customer orders from you under a contract or a purchase order.
- You deliver, send the invoice and record the amount owed in AR.
- The customer pays and the receivable is cleared.
Shopify's example is a customer ordering 300 tiles at $1.50 each. You send a $450 invoice, and that $450 sits in accounts receivable until the customer pays it. You've earned it, it's in your books as income, but it isn't in your bank account yet. Not every sale starts with an invoice, which changes when a receivable exists, so it's worth checking whether an invoice always comes before payment.
Payment terms: Net 30, Net 60 and 2/10 Net 30
The terms you agree decide how long a receivable stays open. Xero lists the common ones:
| Term | What it means | Xero's example |
|---|---|---|
| Net 30 | Payment due within 30 days | A $5,000 branding project invoiced on Net 30 becomes AR the moment you invoice |
| Net 60 | Payment due within 60 days | The same invoice stays open twice as long |
| 2/10 Net 30 | 2% off if paid within 10 days, otherwise the full amount within 30 | The $5,000 invoice paid inside 10 days comes in at $4,900, a $100 saving for the customer |
An early payment discount is a trade. On Xero's example you give up $100 to be paid up to 20 days sooner. Whether that's worth it depends on how tight your cash is that month.
AR and AP: two sides of one invoice
Xero calls accounts receivable and accounts payable two sides of the same coin. AR is what's owed to you, so it's an asset. AP is what you owe, so it's a liability. Every credit transaction creates both at once: your receivable is your customer's payable.
Xero's example is a $3,000 website redesign. The freelancer records it in AR and the client records the same $3,000 in AP. I've written up the paying side in a separate explainer on accounts payable.
| Account | Definition | Where it sits |
|---|---|---|
| Accounts receivable | Owed to you by customers | Current asset on the balance sheet |
| Accounts payable | Owed by you to suppliers | Current liability on the balance sheet |
If you're not sure which report shows what, my guide to the profit and loss vs balance sheet sets out where receivables appear and where your income does.
The catch: profit on paper isn't cash in the bank
Here's the part that catches small businesses out. Xero points out that even a profitable business can run short of cash when customers pay slowly, and too many unpaid invoices risk turning into bad debts that eat into revenue. Your profit and loss can show a great month while the bank balance says the opposite, because the sales are recorded but the cash hasn't arrived.
Xero's Small Business Insights data puts a number on the wait. US small businesses waited an average of 27.9 days to be paid in the December quarter of 2025, the shortest wait since the December quarter of 2021. By that quarter, invoices were paid an average of 7.8 days late, down from 9.3 days late at the start of 2025. So even in an improving quarter, the average invoice still arrived more than a week after it was due.
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That's why a cash flow forecast matters. It shows when receivables will turn into cash, not just that they exist.
Five steps to keep receivables moving
Xero says a clear AR process, from credit terms through to reconciliation, lowers the risk of late payments and bad debts, and that automating invoices and reminders helps you collect consistently. Here's that process in order:
- Agree credit terms before the sale. Put Net 30, Net 60 or an early payment discount in writing so nobody's surprised.
- Invoice on delivery and record it in AR. The day you invoice is the day the receivable starts.
- Send reminders as the due date nears. Automated reminders do this without you having to remember.
- Record the payment and clear the receivable. Match each payment to its invoice so your AR balance stays accurate.
- Reconcile and review overdue invoices. Look at what's late and chase it straight away.
If you'd rather software sent the reminders, I've compared the options in my roundup of the best accounts receivable software.
My take on accounts receivable
A sale isn't finished until the cash is in your account. Agree terms up front, invoice the day you deliver and chase on the first day an invoice is late, not the thirtieth. Cash is what pays the rent, and an invoice sitting in AR doesn't.
Frequently asked questions
Is accounts receivable an asset or a liability?
It's an asset. Xero says AR sits under current assets on the balance sheet because you expect to collect it within a year, usually much sooner.
What is an example of accounts receivable?
In Xero's example, a $5,000 branding project invoiced on Net 30 terms becomes accounts receivable as soon as you send the invoice, and stays there until the customer pays.
What does 2/10 Net 30 mean?
The customer gets 2% off if they pay within 10 days; otherwise the full amount is due within 30 days. On Xero's $5,000 invoice, paying early means paying $4,900.
What's the difference between accounts receivable and accounts payable?
AR is what customers owe you, an asset. AP is what you owe suppliers, a liability. Xero notes that every credit transaction creates both: your AR is your customer's AP.
