What are accounts receivable?
Accounts receivable is the money customers owe a business for goods or services already delivered and invoiced but not yet paid for.
What accounts receivable means
When you sell on credit, you deliver first and get paid later. Between the invoice and the payment, the amount sits in accounts receivable, an asset on the balance sheet. In UK accounts it is usually called trade debtors; the two terms mean the same thing.
Accounting software builds the figure automatically from unpaid sales invoices, and the aged debtor report shows how long each one has been outstanding.
Example
A web agency's aged debtor report at 30 June:
| Customer | Current | 31-60 days | 61-90 days | Over 90 |
|---|---|---|---|---|
| Retail client | £6,000 | |||
| Property firm | £2,500 | £2,500 | ||
| Start-up | £3,000 | £1,800 | ||
| Total £15,800 | £8,500 | £2,500 | £3,000 | £1,800 |
Almost a third of what the agency is owed is over 60 days old, mostly from one client. That is the account to chase, and possibly to stop working for until it pays.
Why it matters for your business
Accounts receivable is profit you have earned but cannot spend yet. Large or slow balances squeeze cash flow and working capital, and the older a debt gets, the less likely it is to be paid. Watching debtor days (average debtors ÷ sales × 365) shows whether customers are paying faster or slower over time.
Debts that will not be paid should be written off as bad debts. If you account for VAT on invoices, you can usually reclaim the VAT on a debt that is more than six months overdue and has been written off.
Getting paid faster
- Invoice as soon as work is done, with clear terms and a due date
- Offer card, direct debit or payment links on the invoice
- Send automatic reminders before and after the due date
- Take deposits on larger jobs
- Use your statutory right to charge late payment interest at 8% above the Bank of England base rate on business-to-business debts, plus fixed compensation
Before you give credit
Check new business customers before offering terms. A quick look at their filed accounts at Companies House, a credit report and a clear signed agreement with payment terms all reduce the risk of a bad debt. Set a credit limit and review it as the relationship grows.
Common questions
An asset. It represents money owed to you that you expect to receive, usually within a year, so it is shown under current assets on the balance sheet, alongside stock, prepayments and cash at bank.
Accounts receivable is money customers owe you. Accounts payable is money you owe suppliers. Receivables are an asset and payables are a liability, and managing the timing between them is the core of cash flow management.
More accounts & bookkeeping terms
- Accounting equation
- Accrual accounting
- Accruals
- Amortisation
- Assets
- Bad debt
- Balance sheet
- Bank reconciliation