What is Accounts Receivable (AR)?

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Accounts receivable (AR) is the total amount of money owed to a business by its customers for goods or services that have been delivered but not yet paid for. It appears on the balance sheet as a current asset — it is cash the business is entitled to but has not yet received.

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AR arises whenever a business sells on credit terms. The moment an invoice is issued and payment is deferred, an AR balance is created. That balance remains open until cash is received and applied against the invoice.

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Why AR matters

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AR is a working capital metric. A large AR balance means a significant portion of the company's cash is tied up in unpaid invoices. How quickly that balance converts to cash — measured by DSO — directly affects how much liquidity is available for operations, investment, and debt service.

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For finance teams, AR management involves more than tracking who owes what. It includes credit risk assessment before extending terms, invoice accuracy to avoid disputes that delay payment, systematic collections follow-up, and rapid cash application when payments arrive.

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The AR process

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Credit assessment. Before extending credit terms to a customer, the business assesses their creditworthiness. Credit limits are set.

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Invoice issuance. When a sale is made on credit, an invoice is issued specifying the amount, due date, and payment terms.

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Collections. As invoices approach and pass their due date, the collections team follows up with customers. Dunning workflows automate reminder sequences.

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Dispute management. If a customer disputes an invoice — incorrect amount, missing delivery confirmation, pricing disagreement — the dispute is logged and resolved before payment is made.

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Cash application. When payment arrives, it is matched to the correct open invoice or invoices. Unmatched payments sit in a suspense account until they can be allocated.

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Reconciliation. The AR subledger is reconciled to the general ledger control account at period end.

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AR in the context of financial close

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At month-end, the AR balance is one of the most scrutinised figures on the balance sheet. Auditors look for evidence that invoices are real, collectible, and accurately stated. Finance teams need to confirm that all cash received has been applied, all disputes are accounted for, and the subledger agrees with the GL.