Accounts receivable

Accounts receivable is the amount owed to a company by its customers for goods delivered or services rendered that have been recognised as revenue but not yet paid for in cash. It sits in the current assets section of the balance sheet because it is expected to be collected within twelve months.

It arises because most business to business commerce operates on credit terms, typically ranging from 30 to 90 days. A company can recognise revenue on the income statement well before the corresponding cash arrives, creating a timing gap that shows up as a receivable on the balance sheet.

The figure reported is almost always net of an allowance for doubtful accounts, which is management's estimate of the portion of outstanding receivables that will not ultimately be collected. This makes the net receivables figure a blend of fact and judgment that warrants scrutiny, particularly when the allowance appears thin relative to the age and composition of the receivable book.

Days sales outstanding, calculated as accounts receivable divided by average daily revenue, is the primary metric analysts use to assess the quality and efficiency of a company's receivables. A rising DSO signals that customers are taking longer to pay, which can indicate deteriorating customer financial health, overly aggressive revenue recognition, or simply poor collections discipline.

The relationship between revenue growth and receivables growth is one of the most watched signals in earnings quality analysis. A company booking revenue faster than it is collecting cash may be pulling forward recognition, offering extended terms to close deals, or in more serious cases recording sales that are not yet genuinely earned. All of these eventually unwind and create pressure on both the balance sheet and the cash flow statement.