Accounts receivable: What it is and how to manage it

Published Friday 23 January 2026

Table of contents

• What is accounts receivable?
• How to calculate accounts receivable
• Is accounts receivable an asset?
• What is ageing of accounts receivable?
• What does an ageing report do?
• What is accounts receivable financing?
• What is a bad debt?
• When should I write off a bad debt?
• Managing your accounts receivable effectively
• FAQs on accounts receivable

Key takeaways

• Implement a systematic collection timeline that starts with automated email reminders on day 1 overdue, progresses to phone calls by day 7, formal collection letters at day 30, and debt collection services after 60 days to maximise payment recovery rates.
• Use ageing reports to prioritise your collection efforts by tracking how many days each invoice is overdue, as older invoices become increasingly difficult to collect and require more immediate attention.
• Consider accounts receivable financing when you need immediate cash flow, as it allows you to sell outstanding invoices to finance companies for 70-90% of their value upfront, though total costs typically reduce your final payment to 85-95% of the original invoice value.
• Write off bad debts when there's no reasonable expectation of payment, such as customer bankruptcy or complete non-response after 6 months, as this provides tax benefits by reducing your taxable income while maintaining accurate financial records.

What is accounts receivable?

Accounts receivable is money that customers owe your business for goods or services delivered on credit. It appears on your balance sheet as a current asset until customers pay their invoices.

Accounts receivable includes:

• creating invoices for completed work
• tracking which invoices have been paid
• following up on overdue payments
• matching customer payments to specific invoices
• creating invoices for completed work
• tracking which invoices have been paid
• following up on overdue payments
• matching customer payments to specific invoices

How to calculate accounts receivable

Calculating your accounts receivable helps you understand how much cash is tied up in unpaid invoices. While accounting software does this for you, the basic formula is straightforward.

Start with your total accounts receivable from the previous period. Add the value of all sales made on credit during the current period. Then, subtract any cash payments you’ve received from customers. The result is your new accounts receivable balance.

Is accounts receivable an asset?

Yes, accounts receivable is a current asset because it represents money customers owe your business. These outstanding invoices have real value and appear on your balance sheet.

The accounts receivable lifecycle shows how an invoice moves through your books:

• Outstanding invoice: Listed as a current asset on your balance sheet.
• Paid invoice: Converted into cash and removed from accounts receivable.
• Unpaid invoice: May eventually be written off as a bad debt expense.
• Written-off debt: No longer treated as an asset in your accounts.

What is ageing of accounts receivable?

Ageing of accounts receivable is the process of tracking how many days an invoice is overdue. You calculate the age by counting days past the due date.

For example:

• Invoice due 10 days ago = 10 days aged.
• Invoice due 30 days ago = 30 days aged.
• Invoice due 90 days ago = 90 days aged.

What does an ageing report do?

An ageing report organises all overdue invoices by how long they’ve been outstanding. This report helps you prioritise collection efforts and spot payment trends.

Ageing reports are useful because they help you focus your collection efforts. Why ageing reports matter:

• Older invoices are less likely to be paid.
• Early action improves collection rates.
• Clear visibility prevents invoices from being forgotten.

You can use a simple timeline to follow up on overdue invoices. Best practice collection timeline:

1. Day 1 overdue: Send an automated email reminder.
2. Day 7 overdue: Call the customer.
3. Day 30 overdue: Send a formal collection letter.
4. Day 60 or more days overdue: Consider using debt collection services.

Get more tips from the Xero guide on how to treat overdue invoices.

What is accounts receivable financing?

Accounts receivable financing lets you sell outstanding invoices to a finance company for immediate cash. This converts unpaid invoices into working capital without waiting for customers to pay.

Here is how invoice financing usually works:

1. Initial payment: The finance company pays 70–90% of the invoice value upfront.
2. Customer pays: Your customer pays the finance company directly.
3. Final payment: The finance company pays you the remaining balance, minus its fees.
4. Total cost: You receive about 85–95% of the original invoice value.

There are some limits on when you can use invoice financing:

• It only works with recent, high-quality invoices.
• It is not suitable for old or disputed debts.
• Fees typically range from 1–5% of the invoice value.

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

What is a bad debt?

A bad debt is an outstanding invoice that you don’t expect to collect from a customer. Writing off bad debts removes uncollectable amounts from your accounts receivable and can reduce your taxable income.

UK tax law says you can only claim a deduction for a debt that is bad, or for a doubtful debt that is likely to become bad.

Writing off bad debts helps you in several ways:

• Accurate reporting: Shows the true value of your receivables.
• Tax benefits: Reduces taxable income for money you will not receive.
• Clean records: Removes old, uncollectable invoices from your books.

When should I write off a bad debt?

Write off bad debts when there’s no reasonable expectation of payment. For tax purposes, you must assess each debt on a case-by-case basis. You can only claim a deduction for specific debts when the circumstances of the particular debtors show that the amounts are bad or doubtful. Common situations include customer bankruptcy, unresolved disputes, or complete non-response to collection efforts.

You might decide to write off an invoice in situations like these:

• Customer bankruptcy: A business has closed or declared insolvency. In the case of the bankruptcy or insolvency of a debtor, the debt can be written off, except for any amount that might still be reasonably recovered.
• Ongoing disputes: Legal disagreements are unlikely to be resolved.
• No response: The customer ignores all collection attempts for more than 6 months.
• Cost vs benefit: Collection costs exceed the invoice value.

After you write off a bad debt, you still have a few actions to take:

• Continue sending periodic reminders.
• If the customer eventually pays, record the amount as income on your next tax return.
• Keep written-off invoices in a separate file for reference.

Managing your accounts receivable effectively

Strong accounts receivable management helps even profitable businesses avoid cash flow problems. When customers pay late, you may struggle to pay suppliers, staff, and other essential expenses.

Effective receivables management supports the long-term health of your business. Why effective receivables management matters:

• Cash flow stability: Ensures money flows in to cover your expenses.
• Business resilience: Protects your business from the impact of late payments.
• Growth funding: Reliable collections provide capital for expansion.

You can improve collections by following a few simple steps:

1. Set clear payment terms before starting work.
2. Send invoices immediately after you complete the work.
3. Follow up consistently on overdue accounts.
4. Offer multiple payment options for customer convenience.

A smooth accounts receivable process gives you more time to focus on what you do best, such as running your business. Online accounting software can help you manage invoices, track payments, and see your cash flow in real-time. You can try Xero for free to see how it simplifies your bookkeeping.

FAQs on accounts receivable

Here are answers to some common questions about accounts receivable.

What is the difference between accounts receivable and accounts payable?

They are two sides of the same coin. Accounts receivable is the money that customers owe your business for goods or services. Accounts payable is the money your business owes to its suppliers or vendors.

Is accounts receivable a debit or a credit?

In accounting, accounts receivable is an asset, so it is recorded as a debit. When a customer pays their invoice, the accounts receivable balance decreases (a credit) and your cash balance increases (a debit).

What is an example of an accounts receivable?

A common example is when a marketing consultant completes a project and sends an invoice to their client with a 30-day payment term. The amount on that invoice is part of the consultant's accounts receivable until the client pays it.