Accounts Receivable

Accounts receivable is a key part of any business that offers goods or services on credit. It represents the money you're owed — and managing it well can make the difference between strong cash flow and financial strain.

Here’s a practical guide to accounts receivable, what it includes, how to report it, and what to do when customers don’t pay.

What Is Accounts Receivable?

Accounts receivable refers to money owed to your business by customers who’ve been invoiced but haven’t yet paid. It appears on your balance sheet as an asset because it's money you're expecting to receive.

If you send an invoice for work done or products delivered, that amount is classed as accounts receivable until it's paid.

Is Accounts Receivable the Same as Trade Debtors?

Yes — “trade debtors” and “accounts receivable” are often used interchangeably in the UK. Both refer to customers who owe money to your business from regular trading activity.

Some accounting software and reports may label this section as “debtors,” while others call it “receivables” — but they mean the same thing.

What Is Ageing of Accounts Receivable?

The ageing of accounts receivable is a method used to categorise unpaid invoices based on how long they’ve been outstanding. It's typically broken down into periods like:

• 0–30 days

• 31–60 days

• 61–90 days

• 91+ days

This helps you track which debts are current and which are overdue, allowing you to follow up on late payments more efficiently.

What Does an Ageing Report Do?

An accounts receivable ageing report gives a snapshot of all outstanding invoices and how long they’ve been unpaid. It’s used to:

• Monitor cash flow

• Chase overdue payments

• Identify potential bad debts

• Support credit control decisions

• Flag high-risk customers

Businesses often review this report weekly or monthly to keep on top of customer debts.

Is Accounts Receivable an Asset?

Accounts receivable is a current asset on your balance sheet. It represents income that will likely be converted into cash within the next 12 months.

Even though it’s not cash in hand yet, it’s still valuable — and important for showing the financial health of your business.

Can I Sell My Accounts Receivable?

You can sell your receivables through a process called invoice factoring or accounts receivable financing.

This involves selling your unpaid invoices to a third party (a factoring company) in exchange for immediate cash — usually a percentage of the invoice value upfront, with the rest (minus fees) paid once the customer settles the invoice.

It can be a useful way to free up cash, but you’ll lose a small portion of the invoice value as a fee.

What Is Accounts Receivable Financing?

Accounts receivable financing is when a business uses unpaid invoices as collateral to get funding.

There are two main types:       

• Factoring: The finance provider buys your receivables and collects the money from customers directly.

• Invoice discounting: You retain control of collections but borrow against the value of your receivables.

This type of finance is common for businesses with long payment cycles or slow-paying customers.

What Is a Bad Debt?

A bad debt is an amount owed to your business that is unlikely to ever be paid. This might be because the customer is insolvent, has disappeared, or is refusing to pay with no legal recourse.

Writing off bad debts ensures your financial records reflect the true expected income of your business.

When Should I Write Off a Bad Debt?

You should write off a debt when you’ve taken all reasonable steps to recover it — such as chasing the payment, sending reminders, issuing a final notice, or involving debt collection services — and it’s clear the customer can’t or won’t pay.

In accounting terms, once you write off the debt, you remove it from your receivables and record it as an expense (called a “bad debt expense”).

Example of Accounts Receivable

Say you provide consultancy services and invoice a client for £1,000, due in 30 days. Until the client pays, that £1,000 is listed in your accounts receivable.

Once the client pays, it’s removed from receivables and added to your bank balance.

What Is the Double Entry for Accounts Receivable?

When you issue an invoice (on credit), the double entry is:

• Debit: Accounts receivable (asset increases)

• Credit: Sales income (revenue increases)

When the customer pays:

• Debit: Bank (cash increases)

• Credit: Accounts receivable (asset decreases)

This ensures your books reflect both the sale and the money owed or received.

What Is the Accounts Receivable Turnover Ratio?

The accounts receivable turnover ratio measures how efficiently your business collects payments from customers.

It’s calculated as:

Turnover Ratio = Net Credit Sales / Average Accounts Receivable

A higher ratio means you're collecting debts quickly. A lower ratio suggests slow payments or poor credit control. It’s a key metric for assessing how healthy your cash flow really is.

Final Thoughts

Accounts receivable is more than just a figure on your balance sheet — it’s money you’ve earned but haven’t yet seen. Managing it well means faster payments, fewer cash flow issues, and fewer bad debts.

Whether you're tracking receivables in spreadsheets or using accounting software, keep your records accurate, follow up on overdue invoices, and understand how your AR process fits into the bigger financial picture of your business.