Accounts receivable (AR) is the money customers owe a business for goods or services it has already provided but not yet been paid for. It sits on the balance sheet as an asset. Under the accrual method, income is generally reported when it is earned, so an unpaid invoice shows up as a receivable. Under the cash method, income is reported when it is received. The IRS notes that unpaid goods and services appear in your books as accounts or notes receivable, and that business bad debts mainly come from credit sales to customers.
What is accounts receivable?
Accounts receivable is the total your customers owe you for work you've done or goods you've delivered. Each unpaid invoice is one receivable. Added together they are your AR balance.
AR is an asset. It is money that belongs to you but hasn't reached your bank account. Its mirror image on the customer's side is accounts payable.
How is accounts receivable recorded?
That depends on your accounting method. IRS Publication 538 puts the difference plainly:
- Accrual method: "you generally report income in the year it is earned." When you bill a customer for work done, you record the income and a receivable at the same time. When they pay, cash goes up and AR goes down.
- Cash method: "you generally report income in the tax year you receive it." There is no income until the money arrives, so many cash-method books don't track AR as income at all.
Under the accrual method, the IRS's all-events test applies. Income is included when all events have occurred that fix your right to receive it and you can determine the amount with reasonable accuracy.
IRS Publication 334 adds that goods and services customers have not paid for "are shown in your books as either accounts receivable or notes receivable."
How does a payment plan show up in AR?
A payment plan turns one sale into a balance that is collected over months. Here is a worked example.
| Item | Amount |
|---|---|
| Program price | $14,800.00 |
| Deposit paid at sign-up | $1,500.00 |
| Balance still owed | $13,300.00 |
| Collected as | 11 × $1,108.33 + 1 × $1,108.37 |
11 × $1,108.33 = $12,191.63. Add the last payment of $1,108.37 and you get $13,300.00.
How much of that $13,300 belongs in AR today depends on what you've earned. If the service is delivered over the same months the customer pays, part of the money may be deferred revenue instead. Ask your accountant how your contracts should be booked.
What's the difference between AR and a note receivable?
An account receivable is usually an invoice on ordinary trade terms, such as Net 30. A note receivable is backed by a written promise to pay, such as a promissory note, often over a longer period. The IRS treats both as receivables when it describes bad debts.
Why does AR matter?
AR is earned income you can't spend yet. A growing AR balance can mean sales are growing. It can also mean customers are paying later. Two tools help tell the difference:
- AR aging sorts what's owed by how far past due it is.
- Days sales outstanding turns the AR balance into an average number of days to collect.
What happens when a receivable can't be collected?
It becomes a bad debt. IRS Publication 334 says business bad debts "are mainly the result of credit sales to customers." If you can't collect part of an account or note receivable, "the uncollectible part is a business bad debt." Whether you can deduct it depends on whether you counted it as income first. See bad debt write-off.
General information, not tax advice.
- IRS: Publication 538, Accounting Periods and Methods
- IRS: Publication 334, Tax Guide for Small Business (Bad Debts)
Every figure on this page was checked against these sources on Oct 6, 2026. General information, not legal or tax advice.