Accounts receivable: definition, process, and tips

Published Friday 20 March 2026

Table of contents

• What is accounts receivable?
• How accounts receivable works
• Accounts receivable vs accounts payable
• Is accounts receivable an asset?
• How to track aging accounts receivable
• When to write off bad debts
• What is accounts receivable financing?
• How Xero simplifies accounts receivable
• FAQs on accounts receivable

Key takeaways

• Track aging accounts receivable regularly and follow a systematic collection process, starting with friendly email reminders on day one overdue, phone calls by day seven, formal requests at day fourteen, and escalating to collections after thirty days.
• Recognize that accounts receivable is a current asset on your balance sheet representing money customers owe you, but write off bad debts when there's no reasonable chance of payment to maintain accurate records and potential tax benefits.
• Implement automated invoicing and payment reminder systems to reduce the time spent chasing overdue payments and improve your cash flow by getting paid faster.
• Consider accounts receivable financing when you need immediate cash flow, understanding that you'll receive up to 90% of invoice value upfront but pay fees to the finance company for this service.

What is accounts receivable?

Accounts receivable is the money customers owe you for goods or services you've already provided. Once you send an invoice, it 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 accounts receivable process includes:

• sending invoices to customers
• tracking whether invoices have been paid
• chasing overdue 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 clear cycle from invoice to payment.

Here's how accounts receivable typically works:

1. Deliver goods or services: you complete work or deliver products to a customer.
2. Send an invoice: you bill the customer with payment terms (for example, due in 30 days).
3. Track the invoice: the amount becomes part of your accounts receivable.
4. Receive payment: the customer pays by the due date (or later).
5. Record the payment: you match the payment to the invoice and update your records.

For example, if you're a contractor who completes a $5,000 project on March 1 with net-30 terms, that $5,000 sits in your accounts receivable until the customer pays. If they pay on March 25, you record the payment and the invoice is closed. If they don't pay by March 31, the invoice becomes overdue and starts aging.

This process differs from accounts payable, which tracks money you owe to others.

Accounts receivable vs accounts payable

Accounts receivable (AR) and accounts payable (AP) are opposite sides of the same transaction.

• Accounts receivable: money customers owe you for goods or services you've provided
• Accounts payable: money you owe suppliers or vendors for goods or services you've received

In short:

• AR = money coming in (you're waiting to receive payment)
• AP = money going out (you need to make payment)

Both affect your cash flow. If customers pay you slowly (high AR), you may struggle to pay your own bills on time (AP). Tracking both helps you plan ahead and avoid cash flow gaps.

Is accounts receivable an asset?

Yes, accounts receivable is an asset. It represents money customers owe you, which has value to your business. On your balance sheet, accounts receivable appears as a current asset because you expect to collect it within a year. As an example from a corporate filing, one company's notes receivable represented less than 3.5% of total assets.

Once a customer pays, the invoice stops being an asset. It becomes cash in the bank. If a customer never pays, you write off the invoice as a bad debt and no longer count it as an asset.

How to track aging accounts receivable

Tracking how long invoices remain unpaid helps you manage collections effectively.

Aging means tracking how many days an invoice is past due. If an invoice was due four days ago, it has an age of four days.

Tracking aging helps you prioritize which invoices to chase first. The longer an invoice goes unpaid, the less likely you are to collect it. That's why businesses budget for an allowance for doubtful accounts, which can amount to millions of dollars.

An aging report lists all your past-due invoices, sorted from least overdue to most overdue. At a glance, you can see which payments you're waiting on and which have been outstanding the longest.

Review your aging report regularly and act quickly. Set clear follow-up steps for each stage:

• Day 1 overdue: Send a friendly email reminder
• Day 7 overdue: Follow up with a phone call
• Day 14 overdue: Send a formal payment request
• Day 30+ overdue: Consider escalating to a collections process

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

When to write off bad debts

Sometimes customers don't pay, and you need to remove those invoices from your records.

A bad debt is an invoice you're unlikely to collect. Writing it off removes the unpaid amount from your accounts receivable and records it as a loss, a process formally addressed in accounting standards like Topic 326, Financial Instruments – Credit Losses.

Writing off bad debts matters for two reasons:

• Accurate records: your books reflect what you'll actually collect
• Tax implications: if you already paid tax on income you never received, writing off the debt lets you claim that tax back

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

• The customer has gone out of business
• The customer is in a dispute that won't be resolved
• The customer has ignored multiple reminders over several months

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?

If you need cash before customers pay their invoices, financing options can help.

Accounts receivable financing (also called invoice financing or invoice factoring) lets you sell unpaid invoices to a finance company for immediate cash. Instead of waiting for customers to pay, you get most of the money upfront.

Here's how it works:

1. You send an unpaid invoice to a finance company.
2. The finance company pays you up to 90% of the invoice value immediately.
3. When your customer pays the invoice, the finance company sends you the remainder minus their fees.

Consider these factors:

• You won't receive the full invoice value: the finance company takes fees for the service
• Old invoices don't qualify: finance companies know older invoices are less likely to be paid
• It's not for bad debts: this option works best for recent invoices from reliable customers

Speak to your accountant or financial advisor before using these services.

How Xero simplifies accounts receivable

Managing accounts receivable doesn't have to be time-consuming. The right tools can help you get paid faster and spend less time chasing invoices.

Xero helps you stay on top of accounts receivable with:

• Automated invoicing: Create and send professional invoices in minutes
• Payment reminders: Set up automatic reminders for overdue invoices
• Aging reports: See exactly who owes you and for how long
• Online payments: Let customers pay directly from their invoice

When you can see your cash flow clearly and follow up on overdue payments quickly, you reduce the risk of bad debts and keep your business running smoothly. Try Xero free for 30 days and see how easy accounts receivable can be.

FAQs on accounts receivable

Here are answers to common questions about managing accounts receivable.

Is accounts receivable a debit or credit?

Accounts receivable is recorded as a debit because it's an asset. When a customer pays, you credit accounts receivable to reduce the balance. If you use accounting software like Xero, the software handles these entries automatically.

Is working in accounts receivable difficult?

Accounts receivable can be demanding because it involves tracking multiple invoices, chasing late payments, and managing customer relationships. Automated tools reduce much of this pressure by handling reminders and tracking automatically.

How can I automate accounts receivable?

Use accounting software like Xero that sends invoices, tracks payments, and sends automatic reminders for overdue accounts. Xero and similar tools can also generate aging reports and accept online payments directly from invoices.

What's a good accounts receivable turnover ratio?

A higher turnover ratio means you're collecting payments quickly. Most businesses aim for a ratio between 7 and 10, meaning you collect the average receivable balance 7 to 10 times per year. The ideal ratio varies by industry.

How long should I wait before chasing an overdue invoice?

Send a friendly reminder on day one after the due date. Follow up with a phone call by day seven. If payment is still outstanding after 14 days, send a formal request. Waiting too long reduces your chances of collecting.