Accounts receivable: definition, process and bad debts

Published Monday 30 March 2026

Table of contents

• What is accounts receivable?
• Why accounts receivable matters to your business
• Accounts receivable vs accounts payable
• How the accounts receivable process works
• Is accounts receivable an asset?
• What is ageing of accounts receivable?
• What does an ageing report do?
• What is a bad debt?
• When should you write off a bad debt?
• What is accounts receivable financing?
• Use Xero to manage your accounts receivable with confidence
• FAQs on accounts receivable

Key takeaways

• Track your accounts receivable using ageing reports to identify overdue invoices and create a systematic follow-up plan with specific timelines for reminders, phone calls, and escalation steps.
• Write off bad debts when there's no reasonable chance of payment (such as when invoices are 90 days past due or customers have gone out of business) to keep your accounting records accurate and potentially claim tax benefits.
• Consider accounts receivable financing to convert unpaid invoices into immediate cash flow by selling them to finance companies, which can help prevent cash flow crises while you wait for customer payments.
• Implement automated invoicing and payment tracking systems to streamline your accounts receivable process, reduce manual work, and maintain better visibility over what customers owe you.

Key takeaways

• Accounts receivable is money customers owe you for goods or services already delivered
• Ageing reports help you track overdue invoices and prioritise collection efforts
• Bad debts should be written off when there's no reasonable chance of payment
• Accounts receivable financing lets you sell invoices for immediate cash flow
• Effective AR management protects your cash flow and keeps your business running smoothly

What is accounts receivable?

Accounts receivable (AR) is money your customers owe you for goods or services you've already delivered. Once you send an invoice, that amount becomes part of your accounts receivable until the customer pays.

The term covers both the money owed and the process of collecting it. The accounts receivable process includes:

• sending invoices to customers
• tracking whether invoices have been paid
• chasing overdue payments
• matching payments to invoices (also called invoice reconciliation)

You may also hear accounts receivable called bills receivable or simply invoicing.

Why accounts receivable matters to your business

Managing your accounts receivable is key to maintaining healthy cash flow. When you track what you're owed, you can make better decisions about spending and growth. A clear view of your accounts receivable helps you understand your financial position and keeps your business running smoothly.

Accounts receivable vs accounts payable

It's simple. Accounts receivable is the money coming into your business from customers. Accounts payable is the money going out of your business to suppliers. Think of it as what you're owed versus what you owe.

How the accounts receivable process works

The accounts receivable process turns your sales into cash. It generally follows these steps:

1. Create and send an invoice to your customer for goods or services.
2. Record the invoice in your accounting software, adding it to your accounts receivable.
3. Track the payment status and send reminders if the invoice becomes overdue.
4. Receive the payment from the customer.
5. Match the payment to the correct invoice to close it out.

Is accounts receivable an asset?

Yes, accounts receivable is an asset. It represents money your customers owe you, which has real value on your balance sheet. In fact, your invoices are valuable enough that some finance companies will buy them from you.

Once a customer pays, the invoice stops being an accounts receivable asset and becomes cash in the bank. If you never get paid, you'll write off the invoice as a bad debt, and it's no longer considered an asset.

What is ageing of accounts receivable?

Ageing of accounts receivable is the process of tracking how long invoices remain unpaid past their due date. You count each day that passes after the payment deadline.

For example, if an invoice was due four days ago, it has an age of four days. The longer an invoice ages, the less likely you are to collect payment.

What does an ageing report do?

An ageing report lists all your past-due invoices, organised from least overdue to most overdue. At a glance, you can see which payments you're waiting on and which have been outstanding the longest.

Under International Financial Reporting Standards (IFRS), credit risk is presumed to have increased significantly once payments are more than 30 days past due.

Review your ageing report regularly and create a clear follow-up plan:

• decide when to send a reminder email (for example, day one)
• decide when to make a phone call (for example, day three)
• decide on escalation steps for invoices that remain unpaid
• decide when to involve a collections process

Check our guide on how to treat overdue invoices for more tips.

What is a bad debt?

A bad debt is an invoice you're unlikely to collect, which you remove from your accounts receivable and record as a loss. Writing off bad debts keeps your accounting records accurate and reflects the true state of your income.

Writing off bad debts also matters for tax purposes. If you've already paid tax on income you never received, you may be able to claim that tax back by formally writing off the invoice.

When should you write off a bad debt?

Write off a bad debt when there's no reasonable chance of getting paid. For example, IFRS guidelines suggest a default is presumed to occur when a financial asset is 90 days past due. Common situations include:

• your customer has gone out of business
• you're in a dispute that's unlikely to be resolved
• your customer is ignoring all payment reminders

Whether you write it off after six months or 18, don't stop trying to collect. Keep sending reminders even after you've written off the debt. If the customer eventually pays, you can declare the income on your next tax return.

What is accounts receivable financing?

Accounts receivable financing (also called invoice financing or invoice factoring) lets you sell unpaid invoices to a finance company in exchange for immediate cash. Instead of waiting for customers to pay, you get most of the money upfront.

Here's how it typically works:

• Upfront payment: the finance company pays you a percentage of the invoice value
• Customer payment: your customer pays the finance company directly
• Remainder payment: once the customer pays, the finance company sends you the remaining balance, minus their fees

Finance companies won't buy very old invoices because they're less likely to be paid. This isn't a solution for clearing bad debts. Speak to your accountant or financial adviser before using these services.

Use Xero to manage your accounts receivable with confidence

Late payments can quickly become a cash flow crisis. When customers don't pay on time, you may struggle to cover suppliers, staff, or other expenses. Poor accounts receivable management is one of the most common reasons small businesses run into financial trouble.

Treating invoices like the assets they are starts with having the right systems in place. Xero simplifies accounts receivable management with:

• automated invoicing: create and send invoices quickly
• real-time ageing reports: see which payments are overdue at a glance
• payment tracking: know exactly what's been paid and what's outstanding
• bank reconciliation: match payments to invoices automatically

Spend less time chasing payments and more time running your business. Get one month free and see how Xero makes managing your accounts receivable easy.

Check our guide on invoicing for more tips.

FAQs on accounts receivable

Here are answers to common questions about accounts receivable.

Is accounts receivable a debit or credit?

Accounts receivable is recorded as a debit on your balance sheet because it represents money owed to your business. When a customer pays, you credit accounts receivable and debit your cash account.

Can you have negative accounts receivable?

Yes, negative accounts receivable can occur if a customer overpays or if you issue a refund before adjusting the original invoice. This creates a credit balance, meaning you owe the customer money.

How long should you keep accounts receivable records?

Keep accounts receivable records for at least seven years to comply with most tax authority requirements. Your accountant can advise on specific retention periods based on your location and business type.

What's a good accounts receivable turnover ratio?

A higher accounts receivable turnover ratio shows you collect payments quickly. The ideal ratio varies by industry, but generally, a ratio of 7–10 suggests healthy collection practices.