Accounts receivable
What accounts receivable is, why it matters, and how to track and collect what your customers owe you.
Published Friday 24 July 2026
Table of contents
Key takeaways
- Accounts receivable is the money your customers owe you for goods or services you’ve delivered on credit, and it sits on your balance sheet as a current asset.
- It’s the opposite of accounts payable: receivable is money coming in, while payable is money going out.
- You can track how quickly you collect what you’re owed with days sales outstanding (DSO) and the accounts receivable turnover ratio.
- Clear payment terms, prompt invoicing, and accounting software help you get paid sooner and protect your cash flow.
What is accounts receivable?
Accounts receivable is the money your customers owe you for goods or services you’ve already delivered but haven’t been paid for yet. You’ll also see it called receivables, trade debtors, or AR, and it usually takes the form of unpaid invoices.
Because you expect to collect this money within a short period, usually 12 months, accounts receivable is recorded as a current asset on your balance sheet. If you’d like a fuller walkthrough, this guide to accounts receivable covers the basics in plain terms.
Is accounts receivable an asset or a liability?
Accounts receivable is a current asset. It represents money you’re owed and expect to receive, so it adds to what your business is worth rather than to what it owes.
It’s classed as current because you’ll normally collect it within a year. Once a customer pays, the amount moves out of accounts receivable and becomes cash.
Accounts receivable vs accounts payable
Accounts receivable and accounts payable are two sides of the same transaction. When you invoice a customer, the amount is your receivable; for that same customer, the amount they owe you is their payable.
The simplest way to tell them apart is direction. Accounts receivable is money coming in, and it’s a current asset. Accounts payable is money going out to your suppliers, and it’s a current liability.
Why accounts receivable matters
Accounts receivable has a direct effect on your cash flow, because a sale doesn’t help you pay your own bills until the money actually lands in your account. The longer invoices stay unpaid, the more your cash is tied up in work you’ve already done.
Keeping receivables under control supports your liquidity and your working capital, giving you the funds to cover wages, stock, and suppliers. It’s also a useful signal of financial health, and staying on top of it in a professional, consistent way helps protect your customer relationships.
How the accounts receivable process works
The accounts receivable process is the set of steps that takes you from agreeing a sale to collecting the cash. Getting each step right keeps your records accurate and your payments on time, and you can dig deeper into the invoicing process for more detail.
- Set your credit terms, so the customer knows how long they have to pay, for example 30 days.
- Send the invoice promptly once the goods or services are delivered.
- Record the receivable in your books as an amount owed to you.
- Monitor what’s outstanding with an ageing schedule that groups invoices by how overdue they are.
- Collect the payment and send reminders on anything past its due date.
- Reconcile the payment against the invoice so your records match your bank account.
How to measure accounts receivable
Measuring accounts receivable tells you how quickly you turn credit sales into cash. Two straightforward metrics do most of the work, and neither needs a spreadsheet full of formulas.
Days sales outstanding (DSO) is the average number of days it takes to collect payment after a sale. You work it out like this: DSO = accounts receivable divided by total credit sales, then multiplied by the number of days in the period. A lower DSO means you’re collecting faster.
The accounts receivable turnover ratio shows how many times you collect your average receivables over a period. The formula is: accounts receivable turnover ratio = net credit sales divided by average accounts receivable. A higher ratio suggests you’re collecting efficiently and your credit terms are working.
How to manage and improve accounts receivable
Managing accounts receivable well is mostly about making it easy for customers to pay and being consistent when they don’t. A few simple habits can shorten the time between sending an invoice and seeing the money arrive.
- Set clear payment terms up front, so there’s no confusion about when payment is due
- Invoice promptly and accurately as soon as the work is done
- Offer online payment options to remove friction and speed up collection
- Follow up on overdue invoices with steady, polite reminders, using tips on chasing outstanding invoices
- Use accounting software to automate reminders and reduce manual admin, which can help you reduce payment delays
Example of accounts receivable
A short example shows how accounts receivable works in practice. Say you run a small design studio in Singapore and finish a branding project for a client.
You send an invoice for S$4,000 with 30-day payment terms. Until the client pays, that S$4,000 sits in your books as accounts receivable, a current asset. When the payment arrives 30 days later, the S$4,000 moves out of receivables and becomes cash in your bank account.
Simplify accounts receivable with Xero
Staying on top of accounts receivable gets much easier when your invoicing, reminders, and reconciliation live in one place. With online invoicing, automated reminders, and a clear view of what’s outstanding, you can spend less time chasing payments and more time running your business.
See how Xero can help you keep cash flowing and get one month free.
FAQs on accounts receivable
Here are answers to some frequently asked questions about accounts receivable to round out the detail above.
Is accounts receivable an asset or a liability?
It’s a current asset, because it represents money customers owe you that you expect to collect within a year.
What is the difference between accounts receivable and accounts payable?
Accounts receivable is money owed to you by customers, while accounts payable is money you owe to suppliers. One is cash coming in, the other is cash going out.
What happens if a customer never pays their invoice?
If it becomes clear you won’t collect, you write the amount off as a bad debt and remove it from accounts receivable. This keeps your books accurate about what you’ll actually receive.
How long should it take to collect accounts receivable?
It depends on your payment terms, but many small businesses aim to collect within 30 days. Tracking your DSO shows whether you’re hitting that target or falling behind.
Is accounts receivable the same as revenue?
No. Revenue is the income you’ve earned from sales, while accounts receivable is the portion of that revenue you’ve invoiced but not yet been paid for.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.