Accounts receivable: definition, process and examples

Published Thursday 2 April 2026

Table of contents

• What is accounts receivable?
• Accounts receivable vs accounts payable
• Examples of accounts receivable
• How the accounts receivable process works
• Is accounts receivable an asset?
• Understanding invoice ageing and ageing reports
• Managing bad debts
• What is accounts receivable financing?
• How to manage accounts receivable effectively
• How Xero simplifies accounts receivable
• FAQs on accounts receivable

Key takeaways

• Establish clear payment terms on every invoice and send bills promptly after completing work to create a predictable cash flow and reduce payment delays.
• Monitor your accounts receivable ageing report weekly to identify overdue invoices early, with escalating follow-up actions starting from day one overdue through formal notices at day 30.
• Automate your accounts receivable process using accounting software to send invoices, track payments, and trigger payment reminders without manual intervention.
• Consider writing off bad debts when customers become insolvent, stop responding to communications, or leave invoices unpaid for extended periods with no reasonable chance of collection.

What is accounts receivable?

Accounts receivable is the money your customers owe you for goods or services you've already provided. Once you send an invoice, that amount becomes part of your accounts receivable until it's paid.

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

• sending invoices: billing customers for completed work or delivered products
• tracking payments: monitoring which invoices have been paid
• chasing overdue payments: following up on late invoices
• reconciling payments: matching incoming payments to the correct invoices

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

Accounts receivable vs accounts payable

These two terms are easy to confuse, but they represent opposite sides of your cash flow.

• Accounts receivable (AR): money customers owe you for goods or services you've provided
• Accounts payable (AP): money you owe to suppliers or vendors for goods or services you've received

A simple way to remember the difference: accounts receivable is money coming in, while accounts payable is money going out. Both appear on your balance sheet, but AR is listed as an asset and AP is listed as a liability.

Managing both effectively keeps your cash flow healthy and your business relationships strong.

Examples of accounts receivable

Here are common scenarios where businesses create accounts receivable.

• Service completed, payment pending: A graphic designer finishes a logo project and invoices the client, due in 30 days
• Products delivered on credit: A wholesaler ships inventory to a retailer with payment terms of net 60
• Subscription billing: A software company invoices monthly subscription fees at the start of each billing cycle
• Milestone payments: A contractor completes phase one of a construction project and bills for that portion of the work

In each case, the business has earned the income but hasn't yet received the cash. That unpaid amount sits in accounts receivable until the customer pays.

How the accounts receivable process works

The accounts receivable process tracks money owed to your business from the moment you complete a sale until payment arrives. Here's how it typically works:

1. deliver goods or services: complete the work or deliver the product to your customer
2. send an invoice: bill the customer with clear payment terms, such as "due in 30 days"
3. record the receivable: log the invoice amount as accounts receivable in your accounting system
4. track payment status: monitor whether invoices are paid on time, overdue, or outstanding
5. follow up on late payments: send reminders or contact customers about overdue invoices
6. receive payment: when the customer pays, record the payment and close out the receivable
7. reconcile accounts: match payments to invoices and update your records

A well-organised AR process helps you get paid faster and keeps your cash flow predictable.

Is accounts receivable an asset?

Yes, accounts receivable is a current asset on your balance sheet. It represents money you're entitled to receive, which has real value to your business.

Here's how AR changes as invoices move through their lifecycle:

• unpaid invoice: recorded as an asset in accounts receivable
• paid invoice: moves from AR to cash, which is also an asset
• uncollectable invoice: written off as a bad debt and removed from assets

In accounting terms, accounts receivable is recorded as a debit when you create an invoice, because it increases your assets. When a customer pays, you credit accounts receivable to reduce it and debit your cash account.

Your invoices are valuable enough that some finance companies will buy them from you. This is called accounts receivable financing.

Understanding invoice ageing and ageing reports

Tracking how long invoices remain unpaid helps you spot cash flow risks early and take action before debts become uncollectable.

What is invoice ageing?

Invoice ageing measures how many days have passed since an invoice was due. If an invoice was due four days ago, it has an age of four days.

The older an invoice gets, the less likely you are to collect it, with one survey finding the average collection time for late B2B payments is 73 days. That's why monitoring ageing is critical for protecting your cash flow.

How ageing reports help you get paid

An ageing report lists all your unpaid invoices, organised from least overdue to most overdue. At a glance, you can see:

• which customers owe you money
• how long each invoice has been outstanding
• which debts need urgent attention

Review your ageing report regularly and set clear escalation steps:

• Day one overdue: send a friendly payment reminder
• Day seven overdue: follow up with a phone call or email
• Day 30 overdue: send a formal notice and consider pausing future work
• Day 90+ overdue: evaluate whether to pursue collection or write off the debt

Acting quickly on overdue invoices improves your chances of getting paid.

Managing bad debts

Not every invoice gets paid. When a customer can't or won't pay, you may need to write off the debt and adjust your records.

What is a bad debt?

A bad debt is an invoice you've determined is unlikely to be collected. Writing it off removes the amount from your accounts receivable and records it as an expense.

This matters for your taxes. If you've already reported the income and paid tax on it, writing off the bad debt lets you claim that tax back.

When to write off a bad debt

Write off a debt when there's no reasonable chance of getting paid. Common situations include:

• customer insolvency: the business has closed or declared bankruptcy
• ongoing disputes: you're unable to resolve a disagreement about the work or payment
• ignored communications: the customer has stopped responding to all contact attempts
• extended non-payment: the invoice has been overdue for an extended period with no progress

Even after writing off a debt, continue sending occasional reminders. If the customer eventually pays, you can declare the income on your next tax return.

What is accounts receivable financing?

Accounts receivable financing lets you convert unpaid invoices into immediate cash, a practice within a global market expected to grow at a compound annual growth rate (CAGR) of 10.11% between 2025–2032. Instead of waiting for customers to pay, you sell your invoices to a finance company and receive most of the value upfront.

This is also called invoice financing or invoice factoring.

How it works

Here's how accounts receivable financing typically works:

1. Submit your invoices: send recent, unpaid invoices to a finance company
2. Receive an advance: get a percentage of the invoice value immediately, which can be up to 75% of the outstanding amount
3. Customer pays: your customer pays the invoice directly to the finance company
4. Receive the remainder: the finance company sends you the balance, minus their fees

Key considerations

Keep these points in mind before using accounts receivable financing:

• Fees reduce your total: You won't receive the full invoice amount
• Only recent invoices qualify: Finance companies typically won't buy old or overdue invoices
• Not a fix for bad debts: This isn't a way to offload invoices that are unlikely to be paid

Speak to your accountant or financial adviser before using accounts receivable financing to make sure it's right for your situation.

How to manage accounts receivable effectively

Strong AR management protects your cash flow and helps your business grow, with recent analysis of over 2,400 companies emphasising working capital management as a key factor for financial resilience amid economic pressures. Here's how to stay on top of what you're owed.

1. set clear payment terms: specify due dates, accepted payment methods, and late payment penalties on every invoice
2. send invoices promptly: bill customers as soon as work is complete or products are delivered
3. make payment easy: offer multiple payment options and include payment links directly on invoices
4. follow up on overdue payments: send reminders before and after due dates, and escalate when needed
5. review ageing reports regularly: check your AR ageing report weekly to catch problems early
6. automate where possible: use accounting software to send invoices, track payments, and trigger reminders automatically

Consistent AR practices reduce late payments and keep cash flowing into your business.

How Xero simplifies accounts receivable

Managing accounts receivable manually takes time you could spend growing your business. Xero automates the repetitive tasks so you can focus on what matters.

With Xero, you can:

• create and send invoices: professional invoices with payment links, sent in seconds
• track payments automatically: see what's paid, what's due, and what's overdue in real time
• set up payment reminders: automatic follow-ups so you don't have to chase customers manually
• run ageing reports: identify overdue invoices and prioritise collection efforts
• accept online payments: let customers pay directly from their invoice

When your AR process runs smoothly, you get paid faster and spend less time on admin.

See how Xero can help you get paid on time. Get one month free.

FAQs on accounts receivable

Here are answers to common questions about managing accounts receivable.

Is accounts receivable a debit or credit?

Accounts receivable is recorded as a debit when you create an invoice, because it increases your assets. When a customer pays, you credit AR to reduce it and debit your cash account.

How do I handle partial payments on invoices?

Record the partial payment against the invoice and keep the remaining balance in accounts receivable. Continue following up until the full amount is paid or you decide to write off the remainder.

What's the difference between accounts receivable and revenue?

Revenue is the total income you've earned, while accounts receivable is specifically the portion of that income you haven't yet collected. Once a customer pays, the amount moves from AR to cash.

How long should I keep trying to collect on overdue invoices?

The right timeframe depends on the amount owed, your relationship with the customer, and whether your collection efforts are producing results. Review each case individually and consider writing off the debt if there's no reasonable chance of payment.