This guide is for bookkeepers and staff accountants who keep the books for small businesses in QuickBooks Online. Beyond the definition, it shows how A/R works in QBO, which helps when a client's A/R balance looks wrong and you need to know why.
Below we cover what A/R is, how it's recorded, how QBO handles it, and the two numbers people use to judge it. We finish with what a healthy A/R balance looks like on a client file. If you need the payables side, our accounts payable guide covers it the same way.
What is accounts receivable?
Trade accounts receivable is the amount customers owe a business for goods or services already delivered on credit. In QuickBooks Online, it is generally represented by outstanding customer invoices. Payment terms are commonly set at net 15 or net 30, although they vary by business.
Because those invoices are normally collected within a year, A/R is classed as a current asset on the balance sheet. It's money the business has earned but doesn't have in the bank yet. That gap is why a client can show a profitable month on the profit and loss and still struggle to make payroll.
Trade A/R generally arises from credit sales. A customer who pays at the counter or online at checkout doesn't create a trade receivable because the sale and payment happen together.
Accounts receivable vs accounts payable
The two accounts mirror each other. One customer's unpaid invoice is A/R for your client and A/P for the customer.
| Accounts receivable | Accounts payable | |
|---|---|---|
| What it is | Money customers owe the business | Money the business owes vendors |
| Balance sheet | Current asset | Current liability |
| Normal balance | Debit | Credit |
| Created in QBO by | Invoices | Bills |
| Cleared in QBO by | Receive payment | Pay bills |
How A/R is recorded: the journal entries
Under accrual accounting, the sale is recorded when the invoice goes out, not when the cash arrives. Say a client invoices a customer $1,200 for a landscaping job. The figures here are illustrative.
| Step | Debit | Credit |
|---|---|---|
| Invoice sent | Accounts receivable $1,200 | Sales income $1,200 |
| Customer pays | Undeposited Funds or bank $1,200 | Accounts receivable $1,200 |
When the payment is correctly applied to the invoice, the customer's outstanding A/R returns to zero and the income stays recorded once. If the payment is recorded but left unapplied, the invoice may remain open even though the customer has paid.
How accounts receivable works in QuickBooks Online
QBO builds A/R from the sales forms your client uses, so the choice of form matters more than most clients realize.
- Invoices record a sale the customer will pay later. Each one adds to A/R until a payment closes it.
- Sales receipts record a sale paid on the spot. They go straight to income and a deposit account, so they never touch A/R. Intuit's guide to invoices vs sales receipts explains when to use each.
- Receive payment applies a customer's money to one or more open invoices. This is the step that reduces A/R.
- Credit memos reduce what a customer owes and can be applied to an open invoice through Receive payment.
Most A/R problems on a client file come from skipping that last link. A client invoices from QBO, the customer pays, and the deposit gets coded to income from the bank feed instead of being matched to the invoice. If the invoice has already recorded the sale, coding the customer's bank deposit directly to income instead of matching it to the invoice can count the revenue twice while leaving the invoice open.
Cash-basis clients add one more wrinkle. Although cash-basis reporting generally excludes unpaid invoices from income, an A/R balance can still appear on a cash-basis balance sheet in QuickBooks Online. Common causes include unapplied customer payments and invoices containing items mapped to balance sheet accounts, such as retainers or security deposits. Investigate the transactions behind the balance before deciding whether it needs correction. Intuit explains this in its guide to A/R and A/P balances on a cash-basis balance sheet.
Two numbers that measure A/R
Clients rarely ask for these, but they're useful when you start offering advisory work on cash flow. Both use credit sales, since cash sales never create a receivable.
Days sales outstanding (DSO) estimates how many days, on average, the business waits to get paid.
\text{DSO} = \frac{\text{Average A/R}}{\text{Net credit sales}} \times \text{Days in the period}A client with beginning A/R of $15,000 and ending A/R of $21,000 has average A/R of $18,000. If the client recorded $54,000 in net credit sales over 90 days, DSO is 30 days. With net 30 payment terms, a DSO of 30 days suggests that customers are paying, on average, within the expected collection window. Review the aging report as well to identify individual overdue invoices.
A/R turnover measures how many times a business collects its average receivables over a given period. When calculated using annual net credit sales, it shows how many times the average A/R balance turns over in a year.
\text{A/R turnover} = \frac{\text{Net credit sales}}{\text{Average accounts receivable}}With $216,000 in annual credit sales and an average A/R of $18,000, turnover is 12. Both examples are illustrative. A rising DSO or a falling turnover is worth a line in the client's monthly notes.
What a clean A/R balance looks like
A trustworthy A/R balance passes four tests. The A/R aging summary ties to the accrual balance sheet for the same date. Every open invoice is one the client really hasn't been paid for. Payments and credits are applied to invoices rather than sitting unapplied. Anything long past due has a decision attached, whether that's collection, a credit or a write-off.
Our step-by-step guide to reviewing a client's A/R aging report walks through each of those checks in QBO. The month-end review checklist covers where A/R fits in a full review. For a file you've just taken on, the bookkeeping checklist for new clients explains what stale A/R tells you.
How Aqqrue helps with A/R on client files
A/R isn't difficult to understand in a single client file. The challenge is keeping track of open invoices, unapplied payments and overdue balances across dozens of clients. Aqqrue reviews client QBO files, surfaces receivables that need attention and helps your team investigate the underlying transactions. Your team retains control over collection decisions and adjustments, and nothing changes in QBO without approval.