What Is Accounts Receivable and How Does It Affect Your Cash Flow?

Accounts receivable (AR) is the money your customers owe you for work you have completed or products you have delivered but have not been paid for yet. Every time you send an invoice and wait for payment, that outstanding amount is part of your accounts receivable.

How Accounts Receivable Works

When you deliver a service or product and invoice a client, two things happen:

You record revenue — your Profit and Loss shows the income as earned
You record a receivable — your Balance Sheet shows money owed to you as an asset

The receivable stays on your books until the client pays. Once payment arrives, the receivable clears and cash goes up.

The gap between those two events — delivering work and receiving payment — is where cash flow problems happen.

Normal Procedure

The AR cycle

Work completed → Invoice sent → Payment received → Receivable cleared

If invoices sit unpaid for 60 or 90 days, you may have strong revenue on your P&L but not enough cash in your account to cover expenses. This is called a cash flow gap.

AR aging

AR aging is a report that groups your outstanding invoices by how long they have been unpaid:

Age	What it means
0–30 days	Normal — most clients pay within terms
31–60 days	Starting to be late — worth following up
61–90 days	Overdue — follow up directly
90+ days	At risk — consider escalating collection efforts

Your Mesa CPA bookkeeper can pull an AR aging report from QBO any time. Reviewing it monthly helps you catch slow payers before they become a real problem.

How AR Affects Cash Flow

AR affects cash flow in two main ways:

Timing gaps

If you invoice $20,000 in December but clients do not pay until February, you have $20,000 in revenue on paper — but not in your account when your January expenses come due.

Bad debt

If a client never pays, you eventually have to write off the invoice as a bad debt. This removes it from AR and records a loss. The cash you expected never arrives.

Ways to protect your cash flow

Shorter payment terms — Net 15 or Net 30 instead of Net 60
Deposits or retainers upfront — collect a portion before work begins
Follow up promptly — a polite reminder at 30 days prevents most late payments
Late payment fees — stated in your contract and on your invoices

Abnormal Procedures

A client is not paying and you have followed up multiple times.

Start by sending a formal written demand for payment. If that does not work, options include a collections agency, small claims court (for smaller amounts), or a lawyer's demand letter. Let your Mesa CPA bookkeeper know — the invoice may need to be written off as bad debt at year-end if it is unrecoverable.

A client disputes an invoice.

Put the disputed amount on hold and work to resolve the issue directly. Do not write it off until the dispute is settled. Your bookkeeper will keep it in AR while it is unresolved.

You need to issue a credit note instead of collecting payment.

See: How to Record a Refund or Credit Note for a Customer.

FAQ

Is accounts receivable an asset or income?

Both, at different stages. When you send the invoice, it becomes income on your P&L. Simultaneously, the outstanding amount sits on your Balance Sheet as a current asset (money you are owed). When the client pays, cash goes up and the receivable goes away.

What is the difference between AR and cash flow?

AR is a balance — what you are owed at a point in time. Cash flow is a movement — what is actually going in and out of your bank account. You can have high AR and low cash at the same time.

How do I know my total AR at any point?

In QBO, go to Reports > Accounts Receivable Aging Summary. It shows every outstanding invoice grouped by age.

Do I need to charge GST/HST on my invoices?

If you are registered for GST/HST (required once you exceed $30,000 in annual revenue), yes. See: How to Set Up Sales Taxes in QuickBooks Online.