Accounts receivable
Learn what accounts receivable means, why it matters, and how to manage it for your small business.
Published Monday 22 June 2026
Table of contents
Key takeaways
- Accounts receivable is the money your customers owe you for goods or services you've already delivered. It's recorded as a current asset on your balance sheet.
- Tracking accounts receivable helps you forecast cash flow, spot late payers early, and keep your business running smoothly.
- The accounts receivable turnover ratio shows how efficiently you're collecting payments. A higher ratio means faster collections.
- Setting clear payment terms, sending invoices promptly, and following up on overdue payments are the foundations of healthy accounts receivable management.
What are accounts receivable?
Accounts receivable is the money owed to your business by customers who've received your goods or services but haven't paid yet. It's recorded as a current asset on your balance sheet because you expect to collect the payment within a short period, usually 30 to 90 days.
If you've ever sent an invoice and waited for payment, you've dealt with accounts receivable. It's one of the most common financial concepts for any business that doesn't require payment upfront.
You might also hear accounts receivable referred to as "trade receivables" or simply "receivables." In your accounting records, each unpaid invoice is tracked individually so you can see exactly who owes you money, how much they owe, and when payment is due. This gives you a clear, up-to-date view of the cash you're expecting to receive.
Why are accounts receivable important?
Accounts receivable directly affects your cash flow. When customers take a long time to pay, your business may struggle to cover everyday expenses like wages, rent, and supplier costs.
As Debbie Williams, co-owner of John Williams Heating Services in Chippenham, puts it: "Being paid on time makes a huge difference to cash flow for a family-run business like ours." Her experience reflects a wider pattern. Xero Small Business Insights data from 440,000 UK small businesses shows payment times holding steady at around 29 days.
Beyond cash flow, accounts receivable gives you a clear picture of your financial health. Keeping a close eye on what you're owed helps you:
- Forecast incoming cash so you can plan spending and investment with confidence
- Identify customers who regularly pay late and adjust your terms accordingly
- Spot potential bad debts before they become a serious problem
- Make informed decisions about extending credit to new customers
How do accounts receivable work?
Accounts receivable follows a straightforward cycle from the moment you deliver a product or service to the point you receive payment.
Here's how the process typically works:
- You deliver a product or complete a service for your customer.
- You send an invoice with your agreed payment terms, for example, "payment due within 30 days."
- The invoice amount is recorded as accounts receivable on your balance sheet.
- Your customer pays the invoice.
- You record the payment and remove the amount from accounts receivable.
Until your customer pays, that invoice sits in your accounts receivable. The longer it stays there, the greater the risk it won't be paid at all.
Most businesses use an accounts receivable ageing report to group outstanding invoices by how long they've been unpaid. Common categories include current, 1 to 30 days overdue, 31 to 60 days overdue, and 61 to 90 days overdue. This makes it easy to spot problem invoices early and take action before they turn into bad debts.
Accounts receivable vs accounts payable
Accounts receivable and accounts payable are 2 sides of the same coin. Understanding the difference helps you manage your cash flow from both directions.
Accounts receivable is money owed to your business. It's an asset because it represents cash you expect to receive. Accounts payable is money your business owes to others, such as suppliers and service providers. It's a liability because it represents cash you need to pay out.
For example, if you're a graphic designer who's completed a project for a client, the unpaid invoice is your accounts receivable. At the same time, the bill from the stock photography service you used on that project is your accounts payable.
Balancing both is essential. If your accounts payable falls due before your accounts receivable comes in, you could face a cash shortfall. Monitoring both together gives you a complete picture of your short-term financial commitments and expected income.
How to calculate the accounts receivable turnover ratio
The accounts receivable turnover ratio measures how efficiently your business collects payments from customers. A higher ratio means you're collecting payments more quickly.
The formula is:
Accounts receivable turnover ratio = Net credit sales / Average accounts receivable
To find your average accounts receivable, add your opening and closing accounts receivable balances for the period, then divide by 2. Net credit sales are your total credit sales minus any returns or allowances.
You can also calculate your days sales outstanding (DSO), which tells you the average number of days it takes to collect payment:
DSO = 365 / Accounts receivable turnover ratio
A lower DSO means you're collecting faster. If your DSO is creeping up over time, it could signal that customers are taking longer to pay.
Accounts receivable example
Here's a practical example to show how accounts receivable works in a real scenario.
Say you run a small marketing agency. In January, you complete a branding project for a client and send an invoice for 5,000 pounds with 30-day payment terms. At this point, your accounts receivable increases by 5,000 pounds.
In February, the client pays the full amount. You record the payment, and your accounts receivable decreases by 5,000 pounds. Your bank balance goes up by the same amount.
Now imagine you had 3 clients with outstanding invoices totalling 15,000 pounds at the start of the quarter, and 9,000 pounds at the end. Your average accounts receivable for that quarter would be 12,000 pounds. If your net credit sales for the quarter were 60,000 pounds, your turnover ratio would be 5. That means you collected your receivables 5 times during the quarter.
How to manage accounts receivable
Good accounts receivable management keeps cash flowing into your business on time. UK small businesses wait an average of 29 days to be paid, according to Xero Small Business Insights. On top of that, payments arrive 8.2 days late on average. Taking a proactive approach to managing your receivables can help you avoid these delays.
Set clear payment terms
Your payment terms set the expectation from the start. Make sure every customer knows exactly when payment is due and how they can pay.
Consider including:
- a specific due date rather than vague wording like "due upon receipt"
- accepted payment methods, such as bank transfer, card, or online payment
- any late payment fees or early payment discounts you offer
Put your terms in writing before you start work. This removes ambiguity and gives you a stronger position if a payment dispute arises. A clear, written agreement also helps your customer budget for the payment on their end.
Send invoices promptly
The sooner you send an invoice, the sooner you get paid. Delays in invoicing push your entire payment timeline back.
Send your invoice as soon as the work is completed or the goods are delivered. Include all the details your customer needs to process payment: your business name, the amount due, the due date, and a clear description of what the charge covers.
Make it easy for customers to pay by offering online payment options directly on the invoice. Accounting software like Xero lets you create and send professional invoices in minutes, with a pay button built right in. The fewer steps between receiving an invoice and paying it, the faster you'll see the money in your account.
Track and follow up on overdue payments
Not every customer pays on time. Having a system in place to chase overdue invoices makes a real difference to your cash flow.
A simple follow-up schedule could look like this:
- Send a friendly reminder a few days before the due date.
- Follow up on the due date if payment hasn't arrived.
- Send a firmer reminder 7 days after the due date.
- Escalate with a phone call or formal letter at 14 days overdue.
Automated invoice reminders in Xero can handle the early stages for you, so you don't have to chase every payment manually.
When to write off bad debt
Sometimes, despite your best efforts, a customer simply won't pay. When you've exhausted all reasonable collection efforts, you may need to write the debt off.
A bad debt write-off removes the unpaid amount from your accounts receivable and records it as an expense. This keeps your financial records accurate and prevents you from overstating your assets.
Before writing off a debt, make sure you've documented your collection attempts. Keep records of every reminder, email, and phone call. You may be able to claim tax relief on the loss through VAT bad debt relief if the debt is more than 6 months overdue and you've already accounted for VAT on the original sale.
To reduce the risk of bad debts in the first place, consider running credit checks on new customers before offering credit terms. Setting credit limits for each customer also helps protect your cash flow if a payment issue arises.
Get one month free
Managing accounts receivable doesn't have to be time-consuming. Xero's accounting software helps you create professional invoices, set up automatic payment reminders, and track outstanding payments in real time. Bank feeds pull your transactions in daily, so you can reconcile payments as they arrive.
You can see at a glance which invoices are outstanding, which are overdue, and how much cash you're expecting. Customisable reports let you dig into your receivables by customer, date range, or ageing period, so you always know where you stand.
With online invoice payments, your customers can pay you directly from the invoice itself. Xero customers who use online invoice payments get paid up to twice as fast. Start simplifying your accounts receivable today and Get one month free.
FAQs on accounts receivable
Here are some frequently asked questions about accounts receivable.
Is accounts receivable an asset or liability?
Accounts receivable is classified as a current asset because your business expects to convert it into cash within 12 months. If an invoice remains unpaid beyond that period, it may be reclassified as a non-current receivable or written off as a bad debt expense.
What is the difference between accounts receivable and revenue?
Revenue is the total income your business earns from sales, recorded when the sale is made. Accounts receivable is the portion of that revenue your customers haven't paid yet.
What legal options do you have for unpaid invoices in the UK?
Under the Late Payment of Commercial Debts (Interest) Act 1998, you can charge interest and claim debt recovery costs on overdue invoices between businesses. For smaller amounts, you can also pursue a claim through the county court money claims online service.
Can you have accounts receivable if you only accept cash?
No. Accounts receivable only exists when you sell goods or services on credit. If all your customers pay at the point of sale, you won't have any accounts receivable on your books.
What happens to accounts receivable at year end?
At year end, you review your outstanding accounts receivable and assess whether any debts are unlikely to be collected. You may need to make a provision for doubtful debts or write off bad debts to ensure your financial statements are accurate.
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.