What is Accounts Receivable? Meaning, Process and Tips

Published Friday 30 January 2026

Table of contents

• What is accounts receivable?
• Why accounts receivable matters to your business
• Accounts receivable vs accounts payable
• Is accounts receivable an asset?
• What is ageing of accounts receivable?
• What does an ageing report do?
• What is accounts receivable financing (invoice financing)?
• What is a bad debt?
• Take control of your accounts receivable
• FAQs on accounts receivable

Key takeaways

• Implement a systematic collection schedule that starts with automated email reminders on day 1 overdue, escalates to personal phone calls by day 7, and considers debt collection services after 60 days to maximise payment recovery.
• Use ageing reports to track overdue invoices and prioritise collection efforts, as payment likelihood decreases significantly over time with default rates climbing from 0.5% for current invoices to 10% for those over 90 days past due.
• Protect your cash flow by setting clear payment terms with specific due dates, running credit checks on customers before extending credit, and invoicing promptly after delivering goods or services.
• Consider invoice factoring or financing when you need immediate cash, but understand you'll receive only 80-90% of the invoice value and these services typically won't accept invoices over 90 days old.

What is accounts receivable?

Accounts receivable is money customers owe your business for goods or services delivered but not yet paid for. Once you send an invoice, that unpaid amount becomes part of your accounts receivable until the customer pays.

The accounts receivable process includes all activities needed to collect customer payments:

• Send invoices: Bill customers for delivered goods or services
• Track payments: Monitor which invoices have been paid
• Chase overdue payments: Follow up on late payments
• Match payments to invoices: Reconcile received payments with outstanding bills

Why accounts receivable matters to your business

Managing accounts receivable well is key to keeping your business healthy. It directly affects your cash flow, which is the money moving in and out of your business.

When you get paid on time, you have the cash you need to pay your own bills, buy supplies, and invest in growth. Healthy accounts receivable also gives you a clearer picture of your financial performance.

Accounts receivable vs accounts payable

It's easy to mix up accounts receivable and accounts payable. Here's a simple way to remember the difference.

• Accounts receivable is the money your customers owe you. Think of it as money coming in.
• Accounts payable is the money you owe your suppliers. Think of it as money going out.

Both are important for understanding your business's overall financial position.

Is accounts receivable an asset?

Accounts receivable is a current asset because it represents money your business will receive. Accounting standards such as Public Benefit Entity International Public Sector Accounting Standard 41 (PBE IPSAS 41), Financial instruments, set the rules for how you record accounts receivable. These unpaid invoices have real value. Some finance companies will purchase them from you for immediate cash.

Invoice lifecycle affects your balance sheet in three ways:

• Unpaid invoice: Recorded as accounts receivable asset
• Paid invoice: Converts to cash (stronger asset)
• Written-off invoice: Removed from assets as bad debt expense

What is ageing of accounts receivable?

Ageing accounts receivable means tracking how many days invoices are overdue. You calculate this by counting each day past the due date. An invoice due four days ago has an age of four days.

What does an ageing report do?

An ageing report organises overdue invoices by how long they've been unpaid. This report is crucial for calculating an allowance for doubtful debts based on expected default rates. It also helps you:

• Identify problem accounts: See which customers consistently pay late
• Prioritise collection efforts: Focus on the oldest unpaid invoices first
• Track payment trends: Monitor whether collection times are improving or worsening

Payment likelihood decreases as invoices age, making quick action essential. For example, guidance from New Zealand's External Reporting Board shows expected default rates can climb from 0.5% for current invoices to 10% for those over 90 days past due. Create a collection schedule:

1. Day 1 overdue: send an automated email reminder
2. Day 7 overdue: make a personal phone call
3. Day 30 overdue: send a formal demand letter
4. Day 60 overdue: consider debt collection services

You can get more tips from the guide on how to treat overdue invoices.

Wait, I can sell my invoices?

Invoice factoring lets you sell unpaid invoices to finance companies for immediate cash. The factoring company then collects payment directly from your customers.

Key limitations:

• Age restrictions: Most companies won't buy invoices over 90 days old
• Customer creditworthiness: Your customers must have good payment history
• Fees apply: You'll receive 80-90% of the invoice value

What is accounts receivable financing (invoice financing)?

Invoice financing works in two payments:

1. Advance payment: Receive 80-90% of invoice value immediately
2. Final payment: Get remaining balance minus fees when customer pays

Important considerations:

• Fees reduce total: You'll receive less than the full invoice amount
• Fresh invoices only: Old or disputed invoices aren't eligible
• Customer notification: Some customers will know you've factored their invoice

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

What is a bad debt?

Bad debt is an unpaid invoice you don't expect to collect. Writing off bad debt serves two purposes:

• Accurate financial records: Removes uncollectable amounts from your accounts receivable
• Tax benefits: Reduces taxable income since you won't receive the money

When should I write off a bad debt?

You should write off bad debt when:

• the customer has closed their business or filed for bankruptcy
• a dispute is unlikely to be resolved
• the customer has not replied after multiple collection attempts
• the invoice has remained unpaid for a long period, based on your credit policy

After write-off: Continue sending payment reminders. If the customer eventually pays, record it as recovered bad debt income.

Take control of your accounts receivable

Managing late payments well helps you avoid cash flow problems and pay suppliers and staff on time. Strong accounts receivable management supports long-term business success.

You can help protect your business by:

• setting clear payment terms with specific due dates and late payment penalties
• running credit checks to assess customer creditworthiness before you extend credit
• invoicing promptly after you deliver goods or services
• following up consistently using systematic collection procedures

You can read more in the guide on invoicing, or get one month free to streamline the accounts receivable process for your business.

FAQs on accounts receivable

Here are some common questions about accounts receivable and how to manage it.

What is full cycle accounts receivable?

Full cycle accounts receivable covers the entire process from creating an invoice to collecting the final payment. It includes sending the invoice, tracking its status, sending reminders, and recording the payment once it's received.

How long should I wait before writing off bad debt?

There's no single rule, but many businesses consider writing off a debt after 90 to 180 days of non-payment. You should write it off when you believe there's no reasonable chance of collecting it, for example, if a customer has gone out of business.

Can I automate my accounts receivable process?

Yes, accounting software like Xero can automate many parts of the accounts receivable process. You can set up automatic invoice reminders, offer online payment options to get paid faster, and easily track which invoices are overdue.

What's a good accounts receivable turnover ratio for small businesses?

A 'good' ratio varies by industry, but a higher ratio is generally better as it means you're collecting payments quickly. It's helpful to compare your ratio to industry benchmarks and track it over time to see if your collection process is improving.