Definition:

Accounts receivable is the money owed by a company’s customers for services or goods.

Example:

We sell a product worth $500, and the customer will pay for it up to 30 days after being invoiced. Although we recognise the revenues from the sale immediately, we won’t receive the cash for a while, so the amount is recorded in accounts receivable. Once the cash is received, it is subtracted from accounts receivable and added to our cash balance.

Why it matters:

Accounts receivable is money a customer owes us for a product or service that has already been delivered. It is a record of cash we expect to receive in future, so is classed as an asset. However, it does not help us pay our own bills, so for early stage businesses generous payment terms and larger accounts receivable will probably result in the need for larger funding rounds.