Accounts receivable: what it means and how to manage it

Published Monday 15 June 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 turnover ratio and days sales outstanding (DSO)
• Accounts receivable financing options
• What is a bad debt?
• Managing your accounts receivable effectively
• FAQs on accounts receivable

Key takeaways

• Accounts receivable is the money customers owe your business for goods or services delivered on credit, and it sits as a current asset on your balance sheet until paid.
• Setting clear payment terms, sending invoices promptly, and following up consistently on overdue accounts helps protect your cash flow and keeps your business running smoothly.
• Tracking metrics like the accounts receivable turnover ratio and days sales outstanding (DSO) gives you a clear picture of how efficiently you're collecting payments.
• Automating your invoicing and payment reminders with accounting software reduces manual admin and helps you stay on top of outstanding invoices.

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 covers the entire accounts receivable process of tracking and collecting these payments. Some businesses use the term "trade debtors" instead, but they mean the same thing.

The accounts receivable process includes 4 key steps:

1. Send invoices to customers for goods or services delivered.
2. Monitor which invoices have been paid and which remain outstanding.
3. Contact customers about overdue payments to maintain cash flow.
4. Match incoming payments to specific invoices in your records.

Accounts receivable vs accounts payable

Accounts receivable and accounts payable are 2 sides of the same coin. Understanding the difference helps you manage your working capital more effectively.

Accounts receivable (AR) is the money your customers owe you, and it's recorded as an asset on your balance sheet. Accounts payable (AP) is the opposite: it's the money you owe your suppliers, recorded as a liability.

In short, AR is money coming in, and AP is money going out. Keeping both under control is essential for healthy cash flow management.

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. Make sure it includes all necessary details like the amount due, due date, and how to pay. Learn more about what is an invoice and what to include.
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, you'd debit $500 to Accounts Receivable and credit $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. Setting clear terms from the start helps avoid confusion and supports timely collections.

Research from Xero Small Business Insights, based on data from 520,000 Australian small businesses, shows that the average time to be paid was 23.9 days in the December quarter of 2025, the fastest result since tracking began in 2017.

Here are some common payment terms used by small businesses:

• Net 30: 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 4 days ago, it has an age of 4 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.

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

According to Xero Small Business Insights data from 520,000 Australian small businesses, invoices were paid an average of 6.6 days late in the December quarter of 2025, the second-lowest result on record. Late payment times vary by industry, ranging from 3.2 days in hospitality to 9.9 days in education and training.

Create a clear collection timeline with specific actions at each stage:

1. Day 1 overdue: send an automated email reminder.
2. Day 7 overdue: make a phone call to the customer.
3. Day 14 overdue: send a formal demand letter.
4. 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 a current asset on your balance sheet because it represents money customers owe your business. These unpaid invoices have real value, and 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 turnover ratio and days sales outstanding (DSO)

The accounts receivable turnover ratio and days sales outstanding (DSO) are 2 key metrics that show how efficiently your business collects payments. Tracking them helps you spot collection problems early and measure improvements over time.

What is the accounts receivable turnover ratio?

The accounts receivable turnover ratio measures how many times your business collects its average accounts receivable balance during a period. A higher ratio means you're collecting payments more quickly.

The formula is:

Accounts receivable turnover ratio = Net credit sales / Average accounts receivable

To calculate average accounts receivable, add the opening and closing balances for the period, 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, your turnover ratio is 12. That means you collected the equivalent of your full receivables balance 12 times during the year.

A ratio between 7 and 10 is generally considered healthy for most small businesses, but this varies by industry. Compare your ratio to previous periods and industry benchmarks to get a useful picture.

What is days sales outstanding (DSO)?

Days sales outstanding (DSO) tells you the average number of days it takes to collect payment after a sale. A lower DSO means you're turning invoices into cash faster.

The formula is:

DSO = (Accounts receivable / Net credit sales) x Number of days in the period

For example, if your accounts receivable balance is $50,000, your net credit sales for the quarter are $150,000, and the quarter has 90 days, your DSO is 30 days. That means it takes an average of 30 days to collect payment.

Track your DSO monthly or quarterly and compare it to your standard payment terms. If your terms are Net 30 and your DSO is consistently above 45 days, that's a sign your collection process needs attention.

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 to 90 days for customer payments, you get money upfront.

Here's how the process works:

1. A finance company pays up to 90% of your invoice value immediately.
2. Your customer pays the invoice directly to the finance company.
3. You receive the remaining balance minus the finance company's fees.

You'll 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 adviser 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.

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 a non-cash basis (also known as accruals basis), writing off the debt allows you to claim a decreasing adjustment and get that previously paid tax back on your next return.

When should you write off a bad debt?

You should write off a bad debt whenever you think there's no reasonable chance of getting paid. Common situations include:

• 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 the customer finally pays, 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 struggle. Late payments from multiple customers can quickly leave you unable to pay suppliers or staff.

Data from Xero Small Business Insights shows that late payments among Australian small businesses improved to an average of 6.6 days in the December quarter of 2025, down from 6.7 days the previous quarter. While that's a positive trend, it still means payments are arriving nearly a week beyond terms on average.

Here are practical steps you can take to strengthen your collections:

• Set clear payment terms upfront and include them on every invoice.
• Send invoices as soon as the work is done or the goods are delivered.
• Offer multiple payment options, such as direct debit, bank transfer, or online card payments, to make it easy for customers to pay.
• Use automated invoice reminders so overdue accounts are followed up without manual effort.
• Review your ageing report weekly and prioritise the largest or oldest outstanding invoices.
• Consider requesting deposits or partial payments upfront for larger projects.

Using billing software to automate your invoicing and payment tracking takes the manual admin out of accounts receivable. Automated reminders, real-time dashboards, and bank feed reconciliation help you stay organised and focus on running your business.

Simplify your accounts receivable with Xero

Staying on top of accounts receivable doesn't have to be complicated. With the right tools, you can automate invoicing, set up payment reminders, and track outstanding payments in real time.

Xero's cloud-based accounting software helps you send professional invoices, reconcile payments automatically, and get a clear view of your cash flow from anywhere. Xero customers who use online invoice payments get paid up to twice as fast, so you can spend less time chasing payments and more time growing your business. Get one month free.

FAQs on accounts receivable

Here are answers to common questions about accounts receivable.

Is managing accounts receivable a hard job?

It can be demanding because you need to stay organised, communicate clearly, and follow up on late payments consistently. Using accounting software to automate reminders and track invoices makes the role much more manageable.

What is an example of an accounts receivable transaction?

A plumber completes a job and sends the client an invoice for $2,000, due in 30 days. That $2,000 is part of the plumber's accounts receivable until the client pays it.

How can I improve my accounts receivable collections?

Start by running credit checks on new customers before extending payment terms, and set clear credit limits so no single account puts your cash flow at risk. A written collections policy with defined escalation steps helps your team act consistently across all overdue accounts.

Is accounts receivable a debit or credit?

Accounts receivable is a debit balance on your balance sheet because it represents an asset, meaning money owed to your business. When a customer pays, you credit accounts receivable to reduce the balance and debit your cash account.

What is a good accounts receivable turnover ratio?

A ratio between 7 and 10 is generally healthy for most small businesses, but it varies by industry. If your ratio is lower than your industry average, it could signal that your credit terms are too generous or your follow-up process needs tightening.

What are the different types of accounts receivable?

The 2 main types are trade receivables, which come from selling goods or services on credit to customers, and non-trade receivables, which cover other amounts owed such as tax refunds, insurance claims, or employee advances. Most small businesses deal primarily with trade receivables.