Accounts receivable: what it is and how to manage it

Published Monday 15 June 2026

Table of contents

• What is accounts receivable?
• Accounts receivable vs accounts payable
• How the accounts receivable process works
• Common accounts receivable payment terms
• How to record accounts receivable
• How to calculate the accounts receivable turnover ratio
• What is an accounts receivable ageing report?
• Tips for managing accounts receivable
• How to handle late payments and bad debts
• Simplify your accounts receivable with Xero
• FAQs on accounts receivable

Key takeaways

• Accounts receivable is the money your customers owe you for goods or services you've already delivered but haven't yet been paid for. It's recorded as a current asset on your balance sheet.
• A clear accounts receivable process, from issuing invoices to following up on overdue payments, helps you maintain healthy cash flow and spend less time chasing money.
• Tracking your accounts receivable turnover ratio and using ageing reports gives you real-time visibility into how quickly you're collecting payments and where potential issues sit.
• Setting clear payment terms, sending invoices promptly, and automating reminders are some of the most effective ways to get paid on time and reduce manual admin.

What is accounts receivable?

Accounts receivable (AR) is the money owed to your business by customers who've received your goods or services but haven't paid yet. It's one of the most important numbers to track because it directly affects your cash flow.

When you sell something on credit, you create an accounts receivable entry. That entry stays on your books until the customer pays. For a deeper look at the concept and why it matters, see this accounts receivable guide.

On your balance sheet, accounts receivable sits under current assets because you expect to collect the payment within 12 months. The total AR balance tells you how much cash is tied up in unpaid invoices at any given time.

Accounts receivable vs accounts payable

Accounts receivable and accounts payable are 2 sides of the same coin. Understanding the difference helps you manage both your incoming and outgoing cash.

• Accounts receivable is money your customers owe you. It's an asset on your balance sheet because it represents future cash coming in.
• Accounts payable is money you owe to your suppliers. It's a liability because it represents cash going out.
• When you send an invoice, you record it as accounts receivable. When you receive a bill, you record it as accounts payable.

Keeping both under control is essential for healthy cash flow. If your receivables are high and your payables are due soon, you could face a cash shortfall even if your business is profitable on paper.

How the accounts receivable process works

The accounts receivable process covers everything from the moment you agree to a sale on credit to the point where you receive payment. Here's how it typically flows.

1. Establish credit terms

Before you deliver goods or services, agree on payment terms with your customer. This includes the due date, accepted payment methods, and any early payment discounts or late payment penalties.

2. Deliver goods or services

Once the terms are set, deliver what you've agreed to. At this point, your customer has an obligation to pay, and you have a right to receive payment.

3. Issue the invoice

Send an invoice as soon as possible after delivery. Include clear details: what was delivered, the amount due, payment terms, and your preferred payment method. The faster you invoice, the sooner you're likely to get paid.

4. Track and follow up

Record the invoice in your accounting software and monitor it against your payment terms. Send reminders before the due date and follow up promptly if a payment is overdue.

5. Receive and reconcile payment

When the customer pays, match the payment to the outstanding invoice and reconcile it against your bank transactions. This closes the receivable and updates your books.

Common accounts receivable payment terms

Payment terms define when you expect to be paid and whether there are incentives for paying early. Setting clear terms upfront helps avoid confusion and delays.

• Net 30: Payment is due within 30 days of the invoice date. This is the most common term for Australian small businesses.
• Net 14 or Net 7: Shorter payment windows that suit businesses with tighter cash flow needs.
• Net 60 or Net 90: Longer terms sometimes used for larger contracts or established clients.
• 2/10 Net 30: The customer gets a 2% discount if they pay within 10 days; otherwise, the full amount is due in 30 days.
• Due on receipt: Payment is expected immediately when the invoice is received.

Choosing the right payment terms depends on your industry, your cash flow needs, and your relationship with the customer. Shorter terms generally improve your cash position, while longer terms might help you win or retain clients.

How to record accounts receivable

Recording accounts receivable correctly keeps your financial statements accurate and gives you a clear picture of money owed to your business. Here's how a typical journal entry works.

When you issue an invoice, you debit (increase) your accounts receivable account and credit (increase) your revenue account. For example, if you invoice a customer for $5,000:

• Debit: Accounts Receivable $5,000
• Credit: Revenue $5,000

When the customer pays, you reverse the receivable. You debit (increase) your cash or bank account and credit (decrease) accounts receivable:

• Debit: Cash / Bank $5,000
• Credit: Accounts Receivable $5,000

If you use accounting software like Xero, these entries are created automatically when you send invoices and reconcile payments. This saves time and reduces the risk of errors.

How to calculate the accounts receivable turnover ratio

The accounts receivable turnover ratio measures how efficiently your business collects payments from customers. A higher ratio means you're collecting faster, which is better for cash flow.

The formula is:

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

To find your average accounts receivable, add your AR balance at the start of the period to your AR balance at the end, then divide by 2.

For example, if your net credit sales for the year are $600,000 and your average accounts receivable is $50,000:

$600,000 / $50,000 = 12

A ratio of 12 means you're collecting your receivables roughly 12 times per year, or about once a month. You can also calculate days sales outstanding (DSO) by dividing 365 by your turnover ratio. In this case, 365 / 12 = about 30 days on average to collect payment.

What is an accounts receivable ageing report?

An accounts receivable ageing report sorts your outstanding invoices by how long they've been unpaid. It's one of the most useful tools for spotting overdue payments before they become a bigger problem.

A typical ageing report groups invoices into time buckets:

• current: not yet due
• 1 to 30 days overdue
• 31 to 60 days overdue
• 61 to 90 days overdue
• over 90 days overdue

By reviewing your ageing report regularly, you can identify which customers are consistently late, prioritise your follow-up efforts, and make informed decisions about extending credit. The longer an invoice goes unpaid, the less likely you are to collect it, so catching overdue invoices early is key.

Tips for managing accounts receivable

Good accounts receivable management keeps cash flowing into your business and reduces the time you spend chasing payments. According to Xero Small Business Insights, Australian small businesses waited an average of 23.9 days to be paid in the December quarter of 2025; the fastest result since the data series began in 2017.

These practical tips can help you stay on top of your receivables.

• Invoice promptly: Send invoices as soon as you deliver goods or services. The sooner your customer receives the invoice, the sooner you can expect payment.
• Set clear payment terms upfront: Make sure your customer knows when payment is due and how to pay before you start work.
• Offer multiple payment methods: Making it easy to pay, including online payment options, removes friction and speeds up collection. Xero customers who use online invoice payments get paid up to twice as fast.
• Automate reminders: Set up automatic payment reminders so you don't have to manually chase every overdue invoice.
• Review your ageing report regularly: Check your ageing report at least monthly so you can follow up on overdue invoices quickly.
• Reward early payment: Consider offering a small discount for customers who pay ahead of the due date.

How to handle late payments and bad debts

Late payments are a reality for most small businesses, but having a plan helps you reduce payment delays and minimise losses. Data from Xero Small Business Insights shows that Australian small businesses were paid an average of 6.6 days late in the December quarter of 2025. Late payment times vary significantly by industry, ranging from 3.2 days in hospitality to 9.9 days in education and training.

When a payment is overdue, start with a friendly reminder. Many late payments are simply oversights. If the invoice remains unpaid after 1 or 2 reminders, follow up with a phone call or more formal written notice.

For invoices that remain unpaid after 90 days, you may need to consider writing them off as bad debts. A bad debt is an amount you've accepted you won't be able to collect. To record a bad debt, you debit a bad debt expense account and credit your accounts receivable account, which removes the amount from your books.

To reduce bad debts over time, consider running credit checks on new customers, setting credit limits, and requiring deposits or partial payments upfront for larger jobs.

Simplify your accounts receivable with Xero

Managing accounts receivable doesn't have to be time-consuming. With Xero, you can send invoices, set up automatic payment reminders, offer online payments, and track outstanding balances in real time, all from one place.

Spend less time on manual admin and more time running your business. Get one month free.

FAQs on accounts receivable

Here are answers to some common questions about accounts receivable.

Is accounts receivable a debit or credit?

Accounts receivable is a debit balance. When you issue an invoice, you debit accounts receivable to increase it, and when the customer pays, you credit it to reduce the balance.

Is accounts receivable an asset?

Yes, accounts receivable is a current asset on your balance sheet. It represents money your customers owe you that you expect to collect within 12 months.

What is the difference between trade receivables and accounts receivable?

Trade receivables are a subset of accounts receivable that relate specifically to amounts owed from the sale of goods or services. Accounts receivable can also include non-trade items like tax refunds or insurance claims.

Does accounts receivable count as revenue?

Accounts receivable isn't the same as revenue, but the 2 are related. Revenue is recognised when you earn it (usually at the point of sale or delivery), while accounts receivable tracks the outstanding payment until it's collected.

What is accounts receivable financing?

Accounts receivable financing lets you borrow against your unpaid invoices to access cash sooner. It's sometimes called invoice factoring or invoice financing, and it can help bridge cash flow gaps while you wait for customers to pay.