Accounts receivable: what it is and how to manage it

Published Friday 27 March 2026

Table of contents

• What is accounts receivable?
• How accounts receivable works
• Accounts receivable vs accounts payable
• Is accounts receivable an asset?
• What is ageing of accounts receivable?
• Common accounts receivable problems and solutions
• How to manage accounts receivable effectively
• What is a bad debt?
• Simplify your accounts receivable with Xero
• FAQs on accounts receivable

Key takeaways

• Treat accounts receivable as a living asset that needs active management — once you send an invoice, track it, follow up on it, and reconcile it promptly to keep cash flowing into your business.
• Act on overdue invoices immediately: send a reminder on day one, call by day seven, and escalate to formal collection steps by day 30, because the longer an invoice ages, the less likely you are to collect it.
• Write off bad debts as soon as there's no reasonable chance of payment, since keeping uncollectable invoices on your books overstates your income and may mean you've paid tax on money you'll never receive.
• Review your ageing report weekly and monitor days sales outstanding (DSO) to spot collection problems early — if a significant portion of your invoices are sitting beyond 60 days, tighten your follow-up process before those debts become unrecoverable.

What is accounts receivable?

Accounts receivable (AR) is 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 the customer pays.

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

• sending invoices to customers
• tracking which invoices are outstanding
• following up on late payments
• matching payments to invoices (also called invoice reconciliation)

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

How accounts receivable works

The accounts receivable process follows a simple cycle from sale to payment. Here's how it works:

1. You provide goods or services: deliver what the customer ordered
2. You send an invoice: include payment terms, due date, and amount owed
3. You track the invoice: monitor whether it's been paid or is overdue
4. The customer pays: you receive payment and record it
5. You reconcile: match the payment to the original invoice in your records

The faster you move through this cycle, the healthier your cash flow. Moving quickly through each stage, especially collecting payments on time, keeps your cash flow healthy so you can pay your own bills.

Accounts receivable vs accounts payable

Accounts receivable (AR) and accounts payable (AP) are opposite sides of the same transaction. Here's the difference:

• Accounts receivable: money customers owe you (an asset)
• Accounts payable: money you owe suppliers (a liability)

When you sell on credit, you create an accounts receivable. When you buy on credit, you create an accounts payable.

Both affect your cash flow:

• AR coming in: improves your cash position when customers pay
• AP going out: reduces your cash position when you pay suppliers

Managing both effectively helps you maintain healthy cash flow and avoid shortfalls.

Is accounts receivable an asset?

Yes, accounts receivable is an asset. It represents money your business has earned but hasn't yet collected, making it a current asset on your balance sheet.

Here's how AR changes over time:

• When you send an invoice: the amount becomes an asset (accounts receivable)
• When the customer pays: the asset converts to cash in your bank account
• If the customer never pays: you write off the invoice as a bad debt, and it's no longer an asset

What is ageing of accounts receivable?

Ageing of accounts receivable is how you track overdue invoices by counting the days since payment was due. 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 it. Tracking ageing helps you prioritise which customers to follow up with first.

What does an ageing report do?

An ageing report lists all your overdue invoices, organised from least 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 on overdue invoices. Here's a simple follow-up schedule to consider:

1. Day one overdue: send a friendly email reminder
2. Day seven overdue: follow up with a phone call
3. Day fourteen overdue: send a formal payment request
4. Day 30+ overdue: consider pausing services or escalating to collections

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

Common accounts receivable problems and solutions

Even with a solid process, accounts receivable can go wrong. Here are the most common problems and how to fix them.

Late-paying customers

• Problem: customers ignore due dates, delaying your cash flow
• Solution: set clear payment terms upfront and send automated reminders before and after the due date

Disputed invoices

• Problem: customers question charges, stalling payment
• Solution: document agreements clearly and address disputes quickly to avoid prolonged delays

Cash flow gaps

• Problem: you're waiting on payments while your own bills come due
• Solution: monitor your ageing report weekly and follow up on overdue invoices immediately

No collection process

• Problem: invoices slip through the cracks because there's no system
• Solution: create a follow-up schedule (email at day one, call at day seven, escalate at day 30)

Inaccurate records

• Problem: payments don't match invoices, causing confusion
• Solution: reconcile payments regularly and use accounting software to automate matching

How to manage accounts receivable effectively

Good AR management helps you get paid faster and spend less time chasing invoices. Here are best practices to follow:

• Set clear payment terms: state due dates, accepted payment methods, and late fees upfront
• Send invoices promptly: the sooner you invoice, the sooner you get paid
• Make paying easy: offer multiple payment options like bank transfer, credit card, or online payment
• Automate reminders: use software to send payment reminders before and after due dates
• Review ageing reports weekly: catch overdue invoices early before they become harder to collect
• Follow up consistently: create a schedule for escalating collection efforts on late payments
• Track key metrics: monitor days sales outstanding (DSO) to measure how quickly you're collecting

Accounting software like Xero can automate many of these tasks, freeing you to focus on running your business instead of chasing payments.

What is a bad debt?

A bad debt is an invoice you're unlikely to collect. When a customer can't or won't pay, you write off the invoice as a loss.

Writing off bad debts matters for two reasons:

• Accurate records: your books reflect actual income, not money you'll never receive
• Tax implications: if you've already paid tax on the invoiced amount, writing it off may let you claim that tax back. Speak to your accountant or financial advisor about how this applies to your situation

When should I write off a bad debt?

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

• the customer has gone out of business
• the dispute is unlikely to be resolved
• the customer is ignoring all your reminders

Even after writing off a debt, keep sending reminders. If the customer eventually pays, speak to your accountant about how to record the recovery correctly.

Simplify your accounts receivable with Xero

Timely payments keep your cash flow healthy and your business secure. A solid AR process helps you get paid faster and spend less time chasing invoices.

You can manage accounts receivable more easily with features like:

• automated invoice reminders: set them once and your follow-ups happen automatically
• real-time ageing reports: see exactly who owes what and for how long
• easy reconciliation: match payments to invoices in a few clicks

Ready to take control of your accounts receivable? Get one month free and start tracking invoices, following up on payments, and maintaining healthy cash flow.

FAQs on accounts receivable

Here are answers to common questions about accounts receivable.

What do you mean by accounts receivable?

Accounts receivable is the money customers owe your business for goods or services you've already delivered but haven't been paid for yet. It sits on your balance sheet as a current asset until the invoice is settled.

Is accounts receivable a debit or credit?

Accounts receivable is recorded as a debit because it's an asset. When you raise an invoice, you debit accounts receivable. When the customer pays, you credit accounts receivable and debit your bank account to reflect the cash received.

What is the role of accounts receivable in my business?

Accounts receivable tracks every dollar customers owe you and directly affects how much cash you have available. Collecting it promptly means you can pay suppliers, cover wages, and reinvest in growth without relying on credit.

How long should I wait before following up on an overdue invoice?

Act immediately. Send a reminder on the day an invoice becomes overdue, follow up with a call by day seven, and escalate to formal collection steps by day 30. The sooner you act, the better your chances of getting paid.

What is a healthy accounts receivable ageing profile?

Most of your outstanding invoices should be under 30 days old. If a significant portion is sitting beyond 60 days, it's a sign your collection process needs tightening before those debts become harder to recover.