What is AR (Accounts Receivable)?
The money customers owe a company for goods or services delivered but not yet paid — and the ERP module that invoices, tracks, and collects it.
Definition
Accounts receivable (AR) is the money customers owe a company for goods or services that have already been delivered and invoiced but not yet paid for, recorded as a current asset on the balance sheet. Managing AR well means invoicing promptly and accurately, applying payments correctly, and following up on overdue balances to keep cash flowing. The health of AR is commonly measured by days sales outstanding (DSO), by the accounts receivable turnover ratio — net credit sales divided by average accounts receivable, showing how many times a year the balance is collected — and by an aging report that buckets invoices by how long they have been outstanding. Because some invoices will never be collected, companies offset the gross balance with an allowance for doubtful accounts and write off confirmed bad debt, so the net figure carried on the balance sheet reflects cash that is realistically expected. Slow collections tie up working capital, so AR is a focus for credit and collections teams.
How AR Works in ERP
An ERP runs accounts receivable as a continuous chain rather than a series of manual steps. Invoices are generated automatically from sales orders, contracts, subscription schedules, or project milestones and posted to the AR subledger, so the customer balance updates the moment goods ship or a milestone is signed off. Incoming payments are then matched to open invoices through cash application, where rules and machine learning read remittance advice, bank statement files, and lockbox feeds to auto-clear invoices and route only the exceptions — short payments, lump-sum remittances, unidentified deposits — to a human. Aging reports are rebuilt on demand from live subledger data, bucketing every open invoice by days overdue, and those buckets drive dunning: the ERP sends escalating reminder emails, places accounts on credit hold when they breach a credit limit, and raises collector tasks without anyone having to run a report first. Every step posts to the general ledger in the same transaction, so the AR control account, revenue, sales tax, and the allowance for doubtful accounts stay reconciled, and DSO and cash-forecast figures reflect activity in real time.
ERP Vendors with Strong AR
Oracle NetSuite
The original cloud ERP — built for fast-growing companies
Sage Intacct
Best-in-class cloud financials for services and nonprofits
Certinia (FinancialForce)
ERP built on Salesforce for professional services
Microsoft Dynamics 365
Modular ERP + CRM tightly integrated with Microsoft 365
Frequently Asked Questions
How is accounts receivable shown on financial statements?
Accounts receivable appears as a current asset on the balance sheet because it is expected to convert to cash within a year. Companies often record an allowance for doubtful accounts alongside it to reflect invoices that may not be collected, so the net figure is a realistic estimate of cash to be received. Changes in AR also flow through the cash flow statement, where rising receivables reduce operating cash. An ERP keeps these figures current as invoices are raised and payments applied.
What does cash application mean in accounts receivable?
Cash application is the process of matching incoming customer payments to the specific open invoices they pay. It can be tricky when a customer pays multiple invoices in one lump sum, short-pays, or omits a remittance reference. Modern ERPs use rules and machine learning to auto-match payments and reduce unapplied cash. Accurate cash application keeps the AR aging report reliable and speeds up collections.
What is an AR aging report?
An accounts receivable aging report lists every open customer invoice sorted into buckets by how long it has been outstanding, typically current, 1-30 days past due, 31-60 days, 61-90 days, and over 90 days. Finance and collections teams use the accounts receivable aging report to see which customers are slipping, to prioritise collection effort on the oldest and largest balances, and to estimate how much of the ledger is likely to become bad debt. In an ERP the aging report is rebuilt from live subledger data, so the buckets reflect every invoice raised and every payment applied up to that moment rather than a stale month-end extract.
How is the accounts receivable turnover ratio calculated?
The accounts receivable turnover ratio is net credit sales for a period divided by the average accounts receivable balance across that same period, where average receivables is the opening balance plus the closing balance divided by two. For example, a company with $6,000,000 of annual net credit sales and average receivables of $750,000 has an accounts receivable turnover ratio of 8.0, meaning it collects the equivalent of its receivables balance eight times a year, or roughly every 46 days. A higher accounts receivable turnover ratio indicates faster collection and tighter credit control, while a falling ratio usually signals lengthening customer payment behaviour or looser credit terms.
What happens when a receivable becomes bad debt?
A receivable becomes bad debt when a company concludes the customer will not pay — because of insolvency, an unresolved dispute, or prolonged non-payment — and the invoice is written off the accounts receivable ledger. Under the allowance method, the company has already estimated uncollectible amounts and holds an allowance for doubtful accounts against receivables, so the write-off reduces both the gross receivable and the allowance rather than hitting the income statement a second time. An ERP posts the write-off against the customer account and the allowance, retains the original invoice and its collection history for audit, and can reverse the entry automatically if the customer later pays.