What is accounts receivable? Definition and examples

Published Monday 30 March 2026

Table of contents

• What is accounts receivable?
• How does accounts receivable work?
• What are examples of accounts receivable?
• Why is accounts receivable important?
• Accounts receivable vs accounts payable
• Is accounts receivable an asset?
• Where accounts receivable can go wrong
• Can you sell your invoices?
• How to manage accounts receivable effectively
• Manage your accounts receivable with confidence
• FAQs on accounts receivable

Key takeaways

• Track your accounts receivable aging weekly and follow up immediately when invoices become overdue, starting with a friendly reminder on day one and escalating to formal requests by day 14 to maximize collection rates.
• Set clear payment terms upfront before delivering goods or services, then send invoices promptly and use accounting software to automate reminders and payment tracking for better cash flow management.
• Monitor both accounts receivable and accounts payable together to avoid cash flow problems, ensuring customers pay you fast enough to cover your own bills and supplier payments.
• Write off bad debts when there's no reasonable chance of collection to keep accurate records and claim tax recovery, but continue sending reminders even after writing off in case the customer eventually pays.

What is accounts receivable?

Accounts receivable is money your customers owe you for goods or services you've provided but haven't been paid for yet. Once you send an invoice, that amount becomes part of your accounts receivable until the customer pays.

The term "accounts receivable" refers to two things:

• The money itself: The total amount customers owe you at any given time
• The collection process: The steps you take to get paid

The accounts receivable process typically includes:

• Sending invoices: Billing customers for goods or services
• Tracking payments: Monitoring which invoices have been paid
• Chasing overdue payments: Following up on late invoices
• Reconciling payments: Matching incoming payments to the correct invoices

You may also hear accounts receivable called "bills receivable" or simply "invoicing."

How does accounts receivable work?

Accounts receivable follows a cycle that starts when you make a sale on credit and ends when the customer pays.

Here's how the accounts receivable process typically works:

1. You deliver goods or services to a customer
2. You send an invoice with payment terms (for example, due in 30 days)
3. The invoice enters your accounts receivable as money owed to you
4. You track the invoice and send reminders if needed
5. The customer pays and you match the payment to the invoice
6. The invoice leaves your accounts receivable and the money enters your bank account

The time between sending an invoice and receiving payment is your accounts receivable cycle. The shorter this cycle, the healthier your cash flow.

Accounting software like Xero automates much of this process, from sending invoices to matching payments and tracking what's overdue.

What are examples of accounts receivable?

Accounts receivable occurs whenever you provide goods or services before receiving payment. Here are some common examples for small businesses:

• Freelance consultant: You complete a project and invoice your client with 14-day payment terms
• Retail supplier: You deliver stock to a shop and give them 30 days to pay
• Tradesperson: You finish a job and send the homeowner an invoice
• Online seller: You ship products to a business customer on account

In each case, the unpaid invoice is part of your accounts receivable until the customer pays.

These transactions are different from accounts receivable:

• Cash sales: Customer pays at the point of sale
• Credit card payments: Payment is processed immediately (even if funds take a day or two to reach your account)
• Prepayments: Customer pays before you deliver

Why is accounts receivable important?

Accounts receivable directly affects your cash flow and your ability to run your business day to day.

Here's why accounts receivable management matters:

• Cash flow: You can't pay your bills, staff, or suppliers until customers pay you
• Working capital: Accounts receivable ties up money that could be used elsewhere in your business
• Business growth: Healthy accounts receivable means more cash available to invest in opportunities
• Profitability: Unpaid invoices can become bad debts, eating into your profits
• Business survival: Healthy accounts receivable helps you avoid cash flow problems, a leading cause of small business failure, with research showing that over 50% of new businesses fail during their first five years

The faster you collect what you're owed, the stronger your financial position. That's why tracking and managing accounts receivable should be a regular part of running your business.

Accounts receivable vs accounts payable

Accounts receivable is money owed to you. Accounts payable is money you owe to suppliers for goods or services they've invoiced you for. They're opposite sides of the same transaction.

Here's how they differ:

• Accounts receivable: Invoices you've sent to customers, waiting for payment
• Accounts payable: Bills you've received from suppliers, waiting to be paid

On your financial statements:

• Accounts receivable appears as an asset: It's money coming in
• Accounts payable appears as a liability: It's money going out

You need to collect accounts receivable fast enough to cover your accounts payable. If customers pay slowly but your bills are due quickly, you'll face cash flow pressure, even if your business is profitable on paper.

Tracking both accounts receivable and accounts payable helps you plan ahead and avoid surprises.

Is accounts receivable an asset?

Yes, accounts receivable is an asset. It represents money you're legally entitled to receive, which gives it real value on your balance sheet.

Accounts receivable is not the same as revenue.Revenue is recorded when you make a sale. Accounts receivable is the asset that exists while you wait for payment.

Here's what happens to accounts receivable over time:

• When the customer pays: Accounts receivable converts to cash, which is an even better asset
• When the customer doesn't pay: You may need to write off the invoice as a bad debt, removing it from your assets

Your invoices are valuable enough that some finance companies will buy them from you. This is called invoice financing or factoring.

Where accounts receivable can go wrong

Even with good systems in place, accounts receivable challenges happen. Late payments, disputes, and uncollectable debts can all affect your cash flow.

Here's what to watch for and how to handle common accounts receivable problems.

What is aging of accounts receivable?

Aging is the process of tracking how long invoices have been overdue. You calculate an invoice's age by counting the days since its due date passed.

For example, if an invoice was due four days ago, it has an age of four days.

An aging report lists all your overdue invoices, organised from least to most overdue. It gives you a clear view of what's outstanding and how long each invoice has been unpaid.

The longer an invoice ages, the less likely you are to collect it. Review your aging report regularly and take action early.

Consider setting up a follow-up schedule:

• Day one overdue: Send a friendly payment reminder email
• Day seven overdue: Follow up with a phone call
• Day 14 overdue: Send a formal payment request
• Day 30+ overdue: Escalate to a collections process

Check our guide on how to treat overdue invoices for more tips.

Managing bad debts

Sometimes, despite your best efforts, invoices go unpaid.

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 to remove it from your accounts receivable.

Writing off bad debts matters for two reasons:

• Accurate records: Your books should reflect money you'll actually receive
• Tax recovery: If you've already paid tax on the sale, writing off the debt lets you claim it back

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

• Customer insolvency: The customer has gone out of business
• Unresolved disputes: You're in a disagreement that won't be settled
• Non-responsive customers: They're ignoring all your reminders

Keep trying after you write it off. Continue sending reminders. If the customer eventually pays, you can declare the income on your next tax return.

Can you sell your invoices?

Invoice financing (also called accounts receivable financing or invoice factoring) lets you sell your unpaid invoices to a finance company in exchange for immediate cash.

Here's how it works:

• Send invoices to customers as usual
• Sell those invoices to a finance company
• The finance company pays you up to 90% of the invoice value upfront
• The customer pays the finance company when the invoice is due
• You receive the remainder minus the finance company's fees

Keep in mind:

• Expect to receive less than the full invoice value: Finance companies charge fees for this service
• Older invoices are harder to sell: Companies are less willing to buy invoices that are already overdue
• Speak to your accountant first: Invoice financing works best for certain business situations

How to manage accounts receivable effectively

Good accounts receivable management helps you get paid faster and protects your cash flow. Follow these steps to stay on top of what you're owed.

1. Set clear payment terms upfront: Agree on due dates before you start work or deliver goods
2. Send invoices promptly: The sooner you invoice, the sooner you get paid
3. Use accounting software: Automate invoicing, reminders, and payment tracking with tools like Xero
4. Review aging reports regularly: Check weekly for overdue invoices so you can act quickly
5. Follow up consistently: Send reminders as soon as invoices become overdue
6. Offer payment options: Make it easy for customers to pay by card, bank transfer, or direct debit
7. Consider early payment incentives: Offer small discounts for customers who pay ahead of time

The more proactive you are, the fewer accounts receivable problems you'll face.

Manage your accounts receivable with confidence

Late payments can put your entire business at risk. When customers don't pay on time, you may struggle to cover your own bills, pay staff, or invest in growth. Cash flow problems are one of the most common reasons small businesses fail. According to IFAC research, only about half of small businesses see their fifth anniversary.

Good accounts receivable management helps you:

• Get paid faster: With clear invoices and automated reminders
• Spot problems early: With real-time aging reports
• Reduce admin time: With automated payment matching and reconciliation
• Protect your cash flow: By staying on top of what's owed

Xero makes managing accounts receivable simple. Send professional invoices, track payments automatically, and see exactly what's outstanding at any time. Get one month free and take control of your cash flow.

For more tips on getting paid, check our guide on invoicing.

FAQs on accounts receivable

Here are answers to common questions about accounts receivable.

What are the three types of accounts receivable?

The three main types are trade receivables (standard customer invoices), notes receivable (formal written promises to pay), and other receivables. Other receivables include employee advances, tax refunds, or insurance claims.

How long should accounts receivable be outstanding?

Most businesses set payment terms of 30, 60, or 90 days. The right timeframe depends on your industry and customer relationships. Monitor your accounts receivable aging regularly and follow up on any invoice that passes its due date.

Can accounts receivable be negative?

Yes, negative accounts receivable can occur if a customer overpays or if you issue a credit. This creates a credit balance you owe back to the customer or can apply to their next invoice.

How do you calculate accounts receivable turnover?

Divide your net credit sales by your average accounts receivable for the period. A higher turnover ratio means you're collecting payments faster. This metric helps you assess how efficiently you're managing accounts receivable.

What's the difference between accounts receivable and revenue?

Revenue is recorded when you make a sale. Accounts receivable is the asset that exists while you wait for payment. Revenue appears on your profit and loss statement. Accounts receivable appears on your balance sheet as a current asset.