Accounts receivable: what it is, ageing and management

Published Thursday 2 April 2026

Table of contents

• What is accounts receivable?
• How accounts receivable works
• Is accounts receivable an asset?
• Accounts receivable vs accounts payable
• What is ageing of accounts receivable?
• What does an ageing report do?
• How to manage accounts receivable effectively
• What is invoice financing?
• What is a bad debt?
• When should I write off a bad debt?
• Manage your accounts receivable with confidence
• FAQs on accounts receivable

Key takeaways

• Implement a systematic follow-up process for overdue invoices by sending friendly email reminders on day one, making phone calls on day seven, sending formal payment requests on day 14, and escalating to collections after 30 days overdue.
• Set clear payment terms upfront and send invoices immediately after delivering goods or services to speed up your cash flow and reduce the time spent chasing payments.
• Review ageing reports weekly to identify overdue accounts early and prioritise collection efforts, as credit risk increases significantly once payments are more than 30 days past due.
• Use accounting software to automate routine tasks like invoice reminders, payment tracking, and ageing reports so you can focus on running your business while maintaining accurate financial records.

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, it becomes part of your accounts receivable until the customer pays.

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

• Sending invoices: billing customers for completed work
• Tracking due dates: monitoring when payments should arrive
• Chasing payment: following up on overdue invoices
• Reconciling payments: matching incoming funds to the correct invoices

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

How accounts receivable works

The accounts receivable process tracks money from the moment you complete work until the customer pays. Understanding this cycle helps you spot delays and collect payments faster.

Here's how the AR cycle typically works:

1. Deliver goods or services: complete the work for your customer
2. Send an invoice: bill the customer with clear payment terms and due date
3. Track the invoice: monitor whether payment arrives on time
4. Follow up on overdue payments: chase late invoices with reminders or calls
5. Record the payment: match incoming funds to the correct invoice
6. Reconcile your accounts: confirm your records match your bank balance

Each step offers an opportunity to speed up payment. Sending invoices promptly, setting clear payment terms, and following up consistently all speed up your cash flow. Accounting software like Xero automates many of these steps, helping you get paid faster with less manual work.

Is accounts receivable an asset?

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

Here's how AR status changes over time:

• Unpaid invoice: appears as a current asset on your balance sheet
• Paid invoice: converts to cash, an even more liquid asset
• Uncollectable invoice: becomes a bad debt write-off and is removed from assets

Accounts receivable vs accounts payable

Accounts receivable (AR) and accounts payable (AP) are opposite sides of the same transaction. Understanding the difference helps you manage cash flow and keep accurate records.

• Accounts receivable: money customers owe you for goods or services you've delivered
• Accounts payable: money you owe suppliers for goods or services you've received

Here's how they compare:

• AR is an asset: it represents future cash coming into your business
• AP is a liability: it represents cash you'll need to pay out
• AR: appears on your balance sheet as a current asset
• AP: appears on your balance sheet as a current liability

Both affect your cash flow. Strong AR collection brings money in faster, while managing AP helps you control when money goes out. Together, they determine how much working capital you have available to run your business.

What is ageing of accounts receivable?

Ageing of accounts receivable is the process of tracking how long invoices have been overdue. You calculate it by counting each day that passes after the payment due date.

For example, if an invoice was due four days ago, it has an age of four days. The sooner you follow up on an invoice, the more likely you are to collect payment. According to international financial reporting standards, credit risk increases significantly once payments are more than 30 days past due. That's why tracking ageing helps you prioritise collection efforts.

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.

Review your ageing report regularly and act quickly. The sooner you follow up on an invoice, the more likely you are to collect payment, though collection rates vary by industry. For example, a Q1 2022 report found that general contractors had 31% of their receivables aged over 90 days, compared to just 1% for travel agents. Set up a consistent follow-up process:

• Day one overdue: send a friendly email reminder
• Day seven overdue: follow up with a phone call
• Day 14 overdue: send a formal payment request
• Day 30+ overdue: consider escalating to a collections process

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

How to manage accounts receivable effectively

Effective AR management protects your cash flow and reduces the risk of bad debts. A consistent process helps you get paid faster and spend less time chasing payments.

Follow these best practices to improve your AR:

1. Set clear payment terms upfront: specify due dates, accepted payment methods, and late payment policies before starting work
2. Send invoices immediately: bill customers as soon as you deliver goods or complete services
3. Make payment easy: offer multiple payment options like bank transfer, credit card, or online payment
4. Automate reminders: set up automatic emails for upcoming and overdue invoices
5. Review ageing reports weekly: identify overdue accounts early and prioritise follow-up
6. Establish a collection process: create consistent steps for chasing late payments at seven, 14, and 30 days overdue
7. Use accounting software: track invoices, payments, and ageing in real time with tools like Xero

Automation handles routine tasks so you can focus on running your business. Xero sends payment reminders, matches bank transactions to invoices, and generates ageing reports automatically.

What is invoice financing?

Invoice financing (also called accounts receivable financing or invoice factoring) lets you get cash from unpaid invoices before your customers pay. Finance companies buy your invoices and pay you a percentage of their value upfront.

Here's how it typically works:

• Upfront payment: you receive an immediate lump sum payment, which can range from 50 to 90 percent of the total invoice value
• Customer pays: your customer pays the finance company directly
• Final payment: you receive the remaining balance, minus fees

Invoice financing can help when cash flow is tight, but it comes with trade-offs:

• Costs: fees reduce your total payment. Factoring companies typically charge between one and five percent of the total invoice amount, so you won't collect the full amount
• Timing matters: finance companies prefer to buy recent invoices
• Best for collectible invoices: finance companies typically only buy invoices you're likely to collect

Speak to your accountant or financial adviser before using invoice financing.

What is a bad debt?

A bad debt is an invoice you're unlikely to collect. If a customer can't pay, you need to write off the invoice and remove it from your accounts receivable.

Writing off bad debts matters for two reasons:

• Accurate records: your books should reflect money you'll actually receive
• Tax implications: you may have already paid tax on income you won't collect, and writing off the debt lets you claim that tax back

When should I write off a bad debt?

Write off a bad debt when collection efforts have been exhausted. Common situations include:

• Customer insolvency: the business has closed or gone bankrupt
• Unresolved disputes: you're in a disagreement that's unlikely to be resolved
• No response: the customer hasn't responded to any payment reminders

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

Manage your accounts receivable with confidence

Timely payments help keep your business financially healthy. When customers pay on time, you can confidently cover supplier bills and staff wages. Strong AR management is one of the keys to small business success.

Treat your invoices like the valuable assets they are. A systematic AR process helps you:

• Get paid faster: clear payment terms and timely invoicing improve collection rates
• Spot problems early: regular ageing reports highlight overdue accounts before they become bad debts
• Protect cash flow: consistent follow-up keeps money moving into your business

Accounting software like Xero automates invoice reminders, tracks payments in real time, and generates ageing reports so you can focus on running your business. Get one month free to see how Xero simplifies your accounts receivable.

Check the guide on invoicing for more tips on getting paid on time.

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 entry because it increases your assets. When a customer pays, you credit accounts receivable to reduce the balance.

How do accounts receivable and accounts payable appear on financial statements?

Accounts receivable appears as a current asset on your balance sheet, while accounts payable appears as a current liability. Together, they show money flowing in and out of your business.

What happens if I don't manage accounts receivable properly?

Tracking overdue invoices helps prevent bad debts, and maintaining healthy cash flow supports small business success. Good AR management helps maintain healthy cash flow, making it easier to pay suppliers, staff, and bills on time.

How long should I keep accounts receivable records?

Keep AR records for at least five–seven years, depending on your jurisdiction's tax requirements. Your accountant can advise on specific retention periods for your location.

Can I automate my accounts receivable process?

Yes. Accounting software like Xero automates invoice sending, payment reminders, bank reconciliation, and ageing reports, so you spend less time on admin and more time running your business.