Accounting

What is Accounts Receivable (Debtors)?

Accounts receivable is money owed to your company by customers who haven't paid their invoices yet. Also called debtors or trade debtors.

Example

You've invoiced £30k but only received £20k. You have £10k in accounts receivable.

Key Dates

Chase late payments before they become bad debts

How Accounts Receivable (Debtors) Works in Practice

Accounts receivable (also called debtors or trade debtors) represents the total amount of money owed to your company by customers for goods or services you have already delivered but not yet been paid for. It appears as a current asset on your balance sheet because it is money you expect to receive within the near term -- typically within your standard payment terms of 14, 30, or 60 days.

Accounts receivable is often one of the largest current assets on a small company's balance sheet, and managing it effectively has a direct impact on cash flow. If customers take longer to pay than expected, your cash flow suffers even though your P&L shows revenue and profit. This is why credit control -- the process of ensuring customers pay on time -- is a critical business function, not just an administrative task.

The ageing of accounts receivable is a key metric to monitor. This breaks down your outstanding invoices by how overdue they are: current (within terms), 30 days overdue, 60 days overdue, 90+ days overdue. As invoices get older, the probability of collection drops significantly. Industry data suggests that after 90 days, the chance of collecting drops below 70%. After 12 months, it can be below 25%.

For VAT-registered businesses, accounts receivable has a VAT dimension. You have already accounted for output VAT on the invoices and may have paid it to HMRC. If the customer never pays, you can reclaim the VAT through bad debt relief once the debt is more than 6 months old and has been written off in your accounts. This is an important but often forgotten recovery mechanism.

Step by Step

When you raise an invoice, the revenue is recognised on your P&L and the corresponding amount is added to accounts receivable on your balance sheet. When the customer pays, accounts receivable decreases and your bank balance increases. The P&L is not affected by the payment -- the revenue was already recognised when the invoice was raised.

Credit control is the process of managing accounts receivable. This involves setting clear payment terms upfront, sending invoices promptly, following up before the due date, chasing systematically when overdue, and escalating to formal debt recovery or legal action when necessary. Automated reminders through accounting software can handle much of this.

At year end, you must assess whether any accounts receivable balances are unlikely to be collected. These should be written off as bad debts (an expense on the P&L) or provided against with a provision for doubtful debts. This ensures your balance sheet does not overstate the money you expect to receive.

Practical Tips

  • Send invoices on the day you deliver the work or goods -- every day of delay in invoicing is a day of delay in getting paid
  • Set up automated payment reminders in your accounting software to follow up at 7 days before due, on the due date, and at 7 and 14 days overdue
  • Run a debtor ageing report weekly and personally follow up on anything over 30 days overdue
  • For new customers or large orders, consider asking for a deposit or upfront payment to reduce your exposure

Common Mistakes to Avoid

  • Not chasing invoices until they are significantly overdue, by which point the customer may have forgotten or be unable to pay
  • Failing to write off genuinely uncollectable debts, which overstates assets and delays the tax deduction for the bad debt
  • Not reclaiming VAT on bad debts over 6 months old, which is money you have already paid HMRC on behalf of a non-paying customer
  • Setting payment terms that are too generous (60+ days) when your own suppliers want paying in 30 days, creating a cash flow gap

Frequently Asked Questions

How long should I wait before writing off a bad debt?

There is no fixed rule, but you should write off debts when there is no realistic prospect of recovery -- for example, the customer has ceased trading, is insolvent, or has disputed the invoice and you have exhausted all options. For VAT bad debt relief, the debt must be at least 6 months old.

Can I claim tax relief on bad debts?

Yes. When you write off a bad debt, it becomes an allowable expense reducing your taxable profit. You can also reclaim VAT on bad debts that are more than 6 months old and have been written off. You must keep records of the original invoice and the write-off.

What payment terms should I set?

The most common terms for UK small businesses are 14 or 30 days. Shorter terms improve cash flow but may not be acceptable to larger clients. Whatever terms you set, enforce them consistently and follow up promptly when they are missed.

Is accounts receivable the same as revenue?

No. Revenue is the total income earned in a period. Accounts receivable is the portion of revenue (and potentially revenue from previous periods) that has not yet been collected in cash. Revenue appears on the P&L; accounts receivable appears on the balance sheet.

What is debtor days and how do I calculate it?

Debtor days measures the average time customers take to pay. The formula is (Accounts Receivable / Annual Revenue) x 365. If you have £25,000 receivable and £300,000 annual revenue, your debtor days are 30. A lower number means faster collections.

Source: HMRC Business Income Manual - bad debts: https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim42700

Related Terms

Accounts Payable (Creditors)

Accounts payable is money your company owes to suppliers and others. Also called creditors or trade creditors.

Bad Debt

Bad debt is money owed to you that you can't collect - typically when a customer doesn't pay and you write off the invoice.

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