Accounts receivable is money your customers owe you for goods or services you have already delivered

When you sell something on credit—meaning the customer receives it now but pays later—that unpaid amount becomes an account receivable. It is an asset on your balance sheet because it represents real money that should come in. The customer has a corresponding debt called an account payable on their end.

Accounts receivable appear on your business's financial statements and affect how much cash you actually have available to spend right now, even if your sales look strong on paper. A company can be profitable in theory but cash-poor in practice if customers are slow to pay.

Key Takeaways

  • Accounts receivable are unpaid invoices from customers who bought on credit, and they sit on your balance sheet as an asset until payment arrives.
  • The longer customers take to pay, the more your working capital gets tied up and the harder it becomes to cover your own bills and payroll.
  • You track receivables by aging them—grouping invoices by how long they have been unpaid—to spot which customers are falling behind.
  • Some businesses sell their receivables to a third party (called factoring) to get cash immediately instead of waiting for payment.
  • Bad debt write-offs happen when you determine a customer will never pay, and you remove that amount from your receivables and record it as a loss.

How accounts receivable affect your cash flow

The gap between when you deliver and when you get paid creates a cash flow problem. If you invoice a customer on the 1st but they do not pay until the 30th, you still have to pay your suppliers, employees, and rent in the meantime. That 30-day gap is real money you cannot use.

The larger your accounts receivable balance grows, the more cash you have locked up waiting for payment. A business that sells $100,000 worth of goods on net-30 terms (payment due in 30 days) might have $100,000 sitting in receivables at any given time. If half your customers pay late, that number climbs higher and your cash position tightens.

This is why many small businesses struggle even when they are busy: they run out of cash before the money comes in, even though they are technically making sales.

Aging your receivables to spot payment problems

You track accounts receivable by aging them—sorting invoices into buckets based on how long they have been unpaid. A typical aging report groups invoices into categories: current (not yet due), 30 days past due, 60 days past due, 90 days past due, and 120+ days past due.

Aging tells you which customers are paying on time and which are dragging their feet. If most invoices are current or only 30 days late, your collection process is working. If a large chunk sits at 90+ days, you have a problem: either the customer is in financial trouble, disputing the invoice, or ignoring you.

Many accounting systems generate aging reports automatically. Review yours monthly so you can contact slow payers before invoices become uncollectible.

Writing off bad debt when payment will not come

At some point, you may determine that a customer will never pay. They have stopped responding, gone out of business, or declared bankruptcy. When that happens, you write off the receivable—remove it from your assets and record it as a bad debt expense on your income statement.

Writing off bad debt reduces your taxable income (which lowers your tax bill) but also reduces the value of your assets. The IRS allows you to deduct bad debts only if you have already reported the income from the original sale, so this applies to invoices you counted as revenue when you issued them.

Keep documentation of your collection efforts—emails, calls, letters—before you write something off. The IRS may ask for proof that you made a genuine attempt to collect.

Factoring: selling receivables for immediate cash

Some businesses cannot afford to wait for payment, so they sell their receivables to a factoring company at a discount. The factor pays you a percentage of the invoice value upfront (typically 70 to 85 percent) and collects the full amount from your customer. The factor keeps the difference as their fee.

Factoring costs money—you lose 15 to 30 percent of the invoice value—but you get cash immediately instead of waiting 30, 60, or 90 days. This is common in industries with long payment cycles, like construction, staffing, and wholesale distribution.

The trade-off is clear: you pay a fee to solve a cash flow problem now. For some businesses, that is worth it. For others, it is cheaper to borrow money or negotiate better payment terms with customers.

Setting payment terms to manage receivables

The payment terms you offer your customers directly shape your receivables balance. Net-30 means payment is due 30 days after the invoice. Net-60 means 60 days. Some businesses offer 2/10 Net-30, which means the customer gets a 2 percent discount if they pay within 10 days, otherwise full payment is due in 30 days.

Shorter terms reduce how long money sits in receivables. If you can move from Net-60 to Net-30, your cash flow improves immediately. Some businesses require payment upfront or at delivery to avoid receivables altogether, though this may make you less competitive.

Your payment terms should reflect your industry norms and your cash flow needs. A business with strong cash reserves can afford longer terms. A business with tight cash flow should push for shorter terms or require deposits.

The difference between accounts receivable and accounts payable

Accounts receivable is money customers owe you. Accounts payable is money you owe your suppliers. They are opposite sides of the same transaction: your receivable is someone else's payable.

On your balance sheet, receivables are an asset (they represent money coming in). Payables are a liability (they represent money going out). Managing both together is how you manage cash flow: you want receivables to come in faster than payables go out.

Frequently Asked Questions

How do I record an account receivable in my accounting system?

When you issue an invoice, you record the sale as revenue and create a receivable entry. Most accounting software (QuickBooks, Xero, FreshBooks) does this automatically when you mark an invoice as sent. The receivable stays on your books until the payment is recorded, at which point it is removed and cash increases by the same amount.

What is the difference between accounts receivable and revenue?

Revenue is the total amount you sold, whether paid or not. Accounts receivable is the portion of that revenue that has not been paid yet. If you sold $10,000 and collected $6,000, your revenue is $10,000 but your receivables are $4,000.

Can I deduct uncollected invoices on my taxes?

Yes, but only if you use the accrual accounting method (not cash basis) and only after you have made genuine collection efforts. You must write off the bad debt in the year you determine it is uncollectible. Keep records of your attempts to collect as proof.

What is a reasonable accounts receivable balance for my business?

It depends on your payment terms and how fast customers pay. If you offer Net-30 terms and customers pay on time, your receivables should equal roughly one month of sales. If customers regularly pay late, the balance will be higher. Track your average days sales outstanding (DSO) to see if you are improving or getting worse.

Should I offer early payment discounts to speed up collections?

It depends on your cash flow needs and profit margins. A 2 percent discount to get paid 20 days early can be worth it if you need cash urgently or if the cost of borrowing is higher than 2 percent. For businesses with healthy cash flow, the discount may not be necessary.