Accounts receivable: what it means and how to manage it

Published Tuesday 20 January 2026

Table of contents

• What is accounts receivable (or trade debtors)?
• Accounts receivable vs accounts payable
• How does the accounts receivable process work?
• How to record accounts receivable
• Common accounts receivable payment terms
• What is ageing of accounts receivable?
• Is accounts receivable an asset?
• Accounts receivable financing options
• What is a bad debt?
• Managing your accounts receivable effectively
• FAQs on accounts receivable

Key takeaways

• Implement a systematic accounts receivable process that includes setting clear payment terms, sending invoices promptly, tracking outstanding payments, and following up consistently on overdue accounts to maintain healthy cash flow.
• Monitor your accounts receivable ageing reports regularly and establish a clear collection timeline with specific actions at each stage, such as automated reminders at day 1 overdue, phone calls at day 7, and formal demand letters at day 14.
• Recognise that accounts receivable is a current asset on your balance sheet that represents real value, and consider accounts receivable financing options when you need immediate cash flow instead of waiting 30-90 days for customer payments.
• Write off bad debts when there's no reasonable chance of collection, as this removes uncollectable amounts from your books and may allow you to claim tax adjustments for GST paid on accruals basis income.

What is accounts receivable (or trade debtors)?

Accounts receivable is the money customers owe your business for goods or services they've received but haven't paid for yet. When you send an invoice, it becomes part of your accounts receivable until the customer pays it. The term also refers to the entire process of collecting these payments.

The accounts receivable process includes four key steps:

1. Invoice creation: Send bills to customers for goods or services delivered.
2. Payment tracking: Monitor which invoices have been paid and which remain outstanding.
3. Payment follow-up: Contact customers about overdue payments to maintain cash flow.
4. Payment reconciliation: Match incoming payments to specific invoices in your records.

Some people use other terms, but in this guide you focus on accounts receivable as the standard way to describe money customers owe you. Learn how to build a strong accounts receivable process.

Accounts receivable vs accounts payable

It's helpful to know the difference between accounts receivable and accounts payable. They are two sides of the same coin.

• Accounts receivable (AR) is the money your customers owe you. It's an asset on your balance sheet.
• Accounts payable (AP) is the money you owe your suppliers. It's a liability on your balance sheet.

In short, AR is money coming in, and AP is money going out.

How does the accounts receivable process work?

A smooth accounts receivable process helps you get paid on time and maintain healthy cash flow. The process generally follows these steps.

1. Set clear credit terms. Before making a sale on credit, decide on your payment terms. This includes the due date and any discounts for early payment or penalties for late payment.
2. Send invoices promptly and accurately. Create and send a clear, professional invoice as soon as the job is done or the product is delivered. Ensure it includes all necessary details like the amount due, due date, and how to pay.
3. Track outstanding invoices. Keep a record of all unpaid invoices. Accounting software can automate this for you, giving you a real-time view of who owes you money.
4. Follow up on overdue payments. When an invoice becomes overdue, start your follow-up process. This can begin with a friendly email reminder and escalate to phone calls if needed.
5. Record and reconcile payments. Once a payment is received, record it in your accounting system and match it to the correct invoice. This keeps your books accurate and up to date.

How to record accounts receivable

When you make a sale on credit, you need to record it in your books. This is done with a journal entry that increases both your accounts receivable and your revenue.

For example, if you sell $500 of services on credit, the entry would be:

• A debit of $500 to Accounts Receivable
• A credit of $500 to Sales Revenue

When the customer pays the invoice, you make another entry to decrease accounts receivable and increase your cash balance.

Common accounts receivable payment terms

Payment terms tell your customers when and how you expect to be paid. Using clear terms can help you get paid faster. Here are some common examples.

• Net 30: This means the full payment is due 30 days after the invoice date. You can also use Net 15, Net 60, or any other number of days.
• 2/10, Net 30: This offers a 2% discount if the customer pays the invoice within 10 days. Otherwise, the full amount is due in 30 days.
• Due upon receipt: Payment is due as soon as the customer receives the invoice. This is common for smaller amounts or new customers.
• Payment in advance (PIA): You require payment before you deliver the goods or services.

What is ageing of accounts receivable?

Ageing accounts receivable means tracking how many days an invoice is overdue. You calculate this by counting each day that's passed since the payment was due.

For example, if an invoice was due four days ago, it has an age of four days. The longer an invoice remains unpaid, the older it becomes.

What does an ageing report do?

An ageing report shows all past-due invoices ranked from least to most overdue. This gives you instant visibility into which payments you're waiting for and which have been outstanding longest.

Why ageing reports matter: The longer an invoice remains unpaid, the less likely you'll collect it. Regular monitoring helps you act quickly to recover payments.

Create a clear collection timeline with specific actions:

• Day 1 overdue: Send an automated email reminder.
• Day 7 overdue: Make a phone call to the customer.
• Day 14 overdue: Send a formal demand letter.
• Day 30 overdue: Consider using debt collection services.

Get tips from the Xero guide on how to treat overdue invoices.

Is accounts receivable an asset?

Yes, accounts receivable is an asset because it represents money customers owe your business. These unpaid invoices have real value. Some companies will even purchase them from you.

When invoices are paid: They convert from accounts receivable into cash, improving your asset position.

When invoices can't be collected: You write them off as bad debts, removing them from your assets.

Accounts receivable financing options

You can sell your unpaid invoices to finance companies through accounts receivable financing. This converts your outstanding invoices into immediate cash instead of waiting for customers to pay.

What is accounts receivable financing?

Accounts receivable financing (also called invoice financing or factoring) converts your unpaid invoices into immediate cash. Instead of waiting 30–90 days for customer payments, you get money upfront.

Here's how the process works:

1. Initial payment: Finance companies pay up to 90% of your invoice value immediately
2. Customer payment: Your customer pays the invoice directly to the finance company
3. Final payment: You receive the remaining balance minus the finance company's fees

What to keep in mind: You receive less than the full invoice value because of fees, and finance companies usually only buy recent, undisputed invoices.

Speak to your accountant or financial advisor before using these types of services.

What is a bad debt?

A bad debt is an unpaid invoice you're unlikely to collect. Writing off bad debts removes them from your accounts receivable and adjusts your financial records.

Why write-offs matter: You may have already paid tax on this uncollected income. According to the Australian Taxation Office (ATO), if you account for goods and services tax (GST) on an accruals basis, writing off the debt allows you to claim a decreasing adjustment and get that tax back on your next return.

When should I write off a bad debt?

You should write off a bad debt whenever you think there's no reasonable chance of getting paid, such as when:

• The customer has gone bankrupt
• There is an unresolved dispute that's unlikely to be settled
• Payment reminders are being ignored

Whether you write it off after 6 months or 18, keep following up on the debt where it makes sense. Even after you've written off the debt, keep sending invoice reminders. If they finally pay, you can always declare the income on your next tax return.

Managing your accounts receivable effectively

Effective accounts receivable management protects your cash flow and prevents the payment delays that cause many small businesses to fail. Late payments from multiple customers can quickly leave you unable to pay suppliers or staff.

Managing accounts receivable can be challenging. It requires organisation, good communication, and persistence to follow up on late payments.

Because the costs of hiring and training can be significant, choosing the right person for this role helps protect your investment. Using software to automate reminders can also make the job much easier.

Ready to improve your accounts receivable management? Try Xero for free and see how automated invoicing and payment tracking can improve your cash flow.

FAQs on accounts receivable

Here are answers to common questions about accounts receivable.

Is accounts receivable a hard job?

Managing accounts receivable can feel demanding because you need to stay organised, communicate clearly, and follow up on late payments. Hiring someone with the right skills and using software to automate reminders can make the role much more manageable.

What is an example of an accounts receivable transaction?

Imagine a construction company completes a project and sends the client an invoice for $5,000, due in 30 days. That $5,000 is now part of the construction company's accounts receivable until the client pays.

How can I improve my accounts receivable collections?

To improve collections, send invoices promptly, offer multiple payment options like direct debit, and set up automated reminders for overdue payments. A clear and consistent follow-up process is key.