Accounts Receivable

What is accounts receivable?

Accounts receivable (AR) is the money that customers owe your business for goods or services you have already delivered but not yet been paid for. Also known as trade receivables, a term used broadly in accounting frameworks including IFRS↗ and GAAP↗, AR represents a short-term promise of payment, typically due within 30, 60, or 90 days.

In simple terms, every time you send an invoice with payment terms↗ that allow a customer to pay later, you create a receivable. Until that cash arrives in your bank account, the outstanding amount sits on your balance sheet as a current asset.

How does the accounts receivable process work?

The accounts receivable process follows a straightforward cycle from sale to cash collection:

1. Deliver goods or services. You complete the work or ship the product to your customer.
2. Issue an invoice. You send an invoice detailing the amount owed, payment terms↗, and due date.
3. Record the receivable. Your finance team logs the invoice in the general ledger↗ as a debit to accounts receivable and a credit to revenue.
4. Track and follow up. You monitor outstanding invoices and send reminders as due dates approach.
5. Collect payment. The customer pays, and you record the cash received, clearing the receivable from your books.

If a customer disputes an invoice or requests an adjustment, you may issue a credit note↗ to reduce the amount owed.

Accounts receivable vs accounts payable

These two terms are often confused, but they represent opposite sides of the same transaction.

• What it is — AR: Money customers owe you. AP: Money you owe suppliers.
• Where it sits — AR: Current asset on your balance sheet. AP: Current liability on your balance sheet.
• Who manages it — AR: Your collections or AR team. AP: Your AP (accounts payable↗) team.
• Goal — AR: Collect cash as quickly as possible. AP: Pay on time while preserving cash flow.

Think of it this way: your accounts receivable is your customer’s accounts payable, and vice versa. Both play a critical role in managing working capital.

Why accounts receivable matters for your business

Accounts receivable is a current asset. It appears on your balance sheet alongside cash, inventory, and prepaid expenses↗. Healthy receivables signal that your business is generating revenue and customers are buying on credit.

However, receivables only matter if they convert to cash. Here is why AR deserves your attention:

• Cash flow depends on it. Revenue on paper means little if payments are stuck in a 90-day cycle. Slow collections can leave you unable to cover accruals↗, payroll, or supplier invoices.
• Accounts receivable turnover tells a story. This ratio measures how efficiently you collect payments. A high turnover means you are converting receivables to cash quickly. A low turnover could signal credit terms that are too generous or a weak collections process.
• Bad debt hurts your bottom line. If a customer never pays, you write off that receivable as a loss, directly reducing your profits.

Accounts receivable management best practices

Good accounts receivable management keeps cash flowing and reduces the risk of unpaid invoices. Here are some proven practices:

• Set clear payment terms upfront. Agree on due dates, late fees, and accepted payment methods before you start work. Common terms include Net 30, Net 60, or Net 90.
• Invoice promptly. The sooner you send an invoice, the sooner you get paid. Delays in invoicing lead to delays in collection.
• Use accounts receivable aging reports. Aging means grouping your outstanding invoices by how long they have been unpaid. The standard categories are 0 to 30 days, 31 to 60 days, 61 to 90 days, and 90+ days. Invoices that move into older categories signal a higher risk of non-payment. Reviewing your aging report regularly helps you prioritise follow-ups, spot problem accounts early, and decide when to escalate collection efforts.
• Follow up consistently. Automated payment reminders before and after due dates significantly reduce late payments.
• Review credit policies regularly. Not every customer deserves the same credit terms. Adjust limits and terms based on payment history and financial health.

Accounts receivable automation

Manual AR processes, such as chasing invoices by email, updating spreadsheets, and reconciling payments by hand, are time-consuming and error-prone. Accounts receivable automation uses software to handle repetitive tasks so your finance team can focus on higher-value work.

What AR automation typically covers:

• Automatic invoice generation and delivery based on completed orders or milestones
• Payment reminders sent at scheduled intervals before and after due dates
• Real-time tracking of invoice statuses, so you always know what is outstanding
• Cash application, matching incoming payments to open invoices
• Reporting and analytics, giving you instant visibility into aging, DSO, and collection trends

DSO (days sales outstanding) estimates the average number of days it takes to collect payment after a sale. A lower DSO means you are turning receivables into cash faster.

The result is faster collections, fewer errors, and better visibility into your cash position.

Accounts receivable examples

Here are a few practical examples of accounts receivable in a B2B context:

• A consulting firm completes a strategy project for a client and sends a £15,000 invoice with Net 30 terms. Until the client pays, that £15,000 is an accounts receivable on the firm’s balance sheet.
• A SaaS company bills its enterprise customers quarterly in arrears. At the end of each quarter, all unpaid invoices become receivables until customers settle their accounts.
• A wholesaler delivers £50,000 worth of inventory to a retailer with Net 60 payment terms. The wholesaler records the amount as a receivable and tracks it through an aging report until payment arrives.

In each case, the business has earned the revenue but has not yet received the cash.