Accounts receivable: definition, process and key tips

Published Wednesday 1 April 2026

Table of contents

• What is accounts receivable?
• How the accounts receivable process works
• Is accounts receivable an asset?
• Accounts receivable vs accounts payable
• Why accounts receivable matters to your business
• What is ageing of accounts receivable?
• What does an ageing report do?
• Common accounts receivable problems
• What is a bad debt?
• When should I write off a bad debt?
• What is accounts receivable financing?
• How Xero simplifies accounts receivable management
• FAQs on accounts receivable

Key takeaways

• Implement a systematic follow-up process for overdue invoices by sending friendly reminders within 1-3 days of the due date, followed by phone calls and formal notices at set intervals to maintain healthy cash flow.
• Monitor your ageing report regularly to track how long invoices remain unpaid and prioritise collection efforts on the oldest outstanding payments, as the likelihood of collection decreases over time.
• Establish clear payment terms upfront and include them on every invoice to set proper expectations with customers and reduce payment delays that can strain your business operations.
• Consider accounts receivable financing when you need immediate cash flow, as it allows you to receive 80-85% of invoice value upfront while a finance company handles collection from your customers.

What is accounts receivable?

Accounts receivable (AR) is money your customers owe you for goods or services they've received but haven't yet paid for. As a financial asset, international accounting standards such as IFRS 9 govern its treatment, outlining the rules for the classification and measurement of such instruments.

Once you send an invoice, that amount becomes part of your accounts receivable until the customer pays.

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

• sending invoices to customers
• tracking whether invoices have been paid
• 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 the accounts receivable process works

The accounts receivable process covers everything from sending an invoice to recording the payment. Understanding each step helps you manage cash flow and spot problems early.

1. Create the invoice: Generate an invoice that includes the amount owed, payment terms, and due date.
2. Send to customer: Deliver the invoice by email, post, or through your accounting software.
3. Track payment status: Monitor whether the invoice has been viewed, paid, or is overdue.
4. Follow up on late payments: Send reminders and make calls when invoices pass their due date.
5. Receive and record payment: Log the payment in your accounting system when it arrives.
6. Reconcile accounts: Match the payment to the original invoice to keep your records accurate.

A clear AR process reduces late payments and keeps your cash flow healthy.

Is accounts receivable an asset?

Yes, accounts receivable is an asset, not a liability. AR represents money customers owe you, which has value to your business. It appears as a current asset on your balance sheet because you expect to collect it within a year.

When a customer pays, the AR converts to cash, which is an even more liquid asset. If you never collect the payment, you write off the invoice as a bad debt and no longer count it as an asset.

Accounts receivable vs accounts payable

Understanding both sides of your business transactions helps you manage cash flow more effectively.

Accounts receivable (AR):

• money customers owe you
• represents incoming cash
• appears as an asset on your balance sheet
• example: you invoice a client for completed work

Accounts payable (AP):

• money you owe suppliers
• represents outgoing cash
• appears as a liability on your balance sheet
• example: you receive a bill from a vendor for supplies

Both affect your cash flow but in opposite directions. Strong AR management brings money in faster, while good AP management helps you pay bills without hurting your cash position.

Why accounts receivable matters to your business

Effective AR management directly affects your ability to operate and grow. When customers pay on time, you have the cash to cover expenses, pay staff, and invest in opportunities.

Poor AR management creates real problems:

• Cash flow gaps: you can't pay suppliers or staff when money is tied up in unpaid invoices
• Missed opportunities: without available cash, you may pass on growth opportunities
• Strained relationships: chasing payments takes time away from serving customers
• Business failure risk: cash flow problems are one of the most common reasons small businesses fail

Small improvements in how you manage AR can make a significant difference to your cash position and reduce financial stress.

What is ageing of accounts receivable?

Ageing of accounts receivable is the process of tracking how long invoices remain unpaid past their due date. You calculate the age by counting each day since the payment was due.

For example, if an invoice was due four days ago and remains unpaid, it has an age of four days. The longer an invoice ages, the less likely you are to collect it.

What does an ageing report do?

An ageing report lists all your unpaid invoices organised by how long they've been 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. Set clear steps for each stage of the collection process:

• Day 1: Send a friendly payment reminder by email.
• Day 3: Follow up with a phone call.
• Day 7: Send a formal overdue notice.
• Day 14+: Consider escalating to a collections process.

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

Common accounts receivable problems

Recognising AR issues early helps you protect your cash flow and maintain healthy customer relationships. Here are the most common problems small businesses face:

• Late payments: customers consistently pay after the due date, straining your cash flow
• Invoice disputes: customers challenge the amount, timing, or terms of an invoice
• Tracking errors: lost or duplicate invoices create confusion and delay payments
• Customer insolvency: customers go out of business before paying what they owe
• Weak follow-up: without a clear process, overdue invoices slip through the cracks

Most of these problems can be prevented or minimised with clear payment terms, accurate invoicing, and consistent follow-up processes.

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 lost income in your accounting records.

Writing off bad debts matters for two reasons:

• Accurate records: Your financial statements reflect your true income.
• Tax recovery: If you've already paid tax on that invoice, writing it off lets you claim that tax back.

When should I write off a bad debt?

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

• Customer insolvency: Your customer has gone out of business.
• Unresolved disputes: You're in a disagreement that's unlikely to be settled.
• Non-responsive customers: They're ignoring all your payment reminders.

The timing varies. Some businesses write off debts after six months, others wait 18 months. Choose a policy that works for your cash flow.

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

What is accounts receivable financing?

Accounts receivable financing (also called invoice financing or invoice factoring) lets you get cash from unpaid invoices before your customers pay. This practice is not new; it has been a fact of business life) since before 1400 in England and arrived in America with the Pilgrims.

You sell your invoices to a finance company, and they collect the payment from your customer.

Here's how it typically works:

• Upfront payment: The finance company pays you an advance that typically covers 80%–85%) of the invoice value.
• Collection: They collect the full amount from your customer.
• Final payment: You receive the remaining balance, minus their fees.

Finance companies are less likely to buy older invoices because collecting them is harder.

Speak to your accountant or financial advisor before using these services to understand the costs involved, as many factoring companies have specific requirements like revenue minimums) (for example, at least $500,000 annually) to ensure the arrangement is profitable.

How Xero simplifies accounts receivable management

Managing accounts receivable doesn't have to be complicated. Xero automates the time-consuming parts so you can focus on running your business.

With Xero, you can:

• Create and send invoices: Build professional invoices in minutes and send them directly to customers.
• Set up payment reminders: Automate follow-ups so you don't have to chase payments manually.
• Track ageing invoices: See which invoices are overdue at a glance with built-in ageing reports.
• Reconcile payments: Match incoming payments to invoices automatically with bank feeds.
• Monitor cash flow: Get real-time visibility into what's owed and what's been paid.

FAQs on accounts receivable

Here are answers to common questions about managing your accounts receivable.

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

Send a friendly reminder within one to three days of the due date. Early follow-up signals that you take payments seriously and often prompts faster payment.

What are typical payment terms for small businesses?

Most small businesses use payment terms of 14, 30, or 60 days. Shorter terms improve cash flow, while longer terms may help you win customers in competitive markets.

Can I charge interest on overdue invoices?

Yes, but you must include the interest terms in your original invoice or contract. Check local regulations, as rules vary by location.

Do I need special software to manage accounts receivable?

You don't need special software, but accounting software like Xero makes AR management much easier. It automates invoicing, tracks payments, and generates ageing reports so you can focus on your business.

What's the difference between an invoice and a receipt?

An invoice requests payment for goods or services provided. A receipt confirms that payment has been received. You send an invoice before payment and a receipt after.