What is accounts receivable?

Accounts receivable (AR) is a straightforward concept: it's money your customers owe you. You've invoiced them, delivered the goods or services, but they haven't paid yet. That unpaid amount sits on your balance sheet as an asset – a current asset, specifically, because you expect to collect it within a year.

For most businesses, accounts receivable is completely normal. You deliver work on Day 1, invoice on Day 2, and get paid on Day 30 (or 60, or 90). The gap between delivery and payment is your accounts receivable. The longer the gap, the more cash you're leaving on the table.

Accounts receivable meaning (trade debtors)

Accounts receivable is also called trade debtors, trade receivables, or customer receivables. They're all the same thing: money owed to you by customers for goods or services you've already provided.

The key distinction: it's only accounts receivable once you've delivered. If a customer gives you a deposit before work starts, that's not AR yet – it's a prepayment or advance. Once you've earned it, it becomes accounts receivable.

A simple accounts receivable example

Say you're a freelance designer. On 1 March you complete a website for a client and invoice them for £5,000. You tell them payment is due on 31 March. From 1 March to 31 March, that £5,000 is accounts receivable. On 1 April, when their payment hits your bank account, it stops being AR and becomes cash.

If the same client then has you do more work in April (another £3,000 invoiced, due 30 April), you now have £3,000 in AR. And so on. At any given moment, your AR balance is the total of all invoices customers haven't paid yet.

How does accounts receivable work?

The accounts receivable process, step by step

1. You deliver. You complete the work or ship the goods.
2. You invoice. You send an invoice with payment terms (Net 30, Net 60, whatever you've agreed).
3. It becomes AR. The moment you invoice, that amount appears on your books as accounts receivable.
4. You wait. The customer has 30/60/90 days (or whenever you agreed) to pay.
5. They pay. When payment arrives, you remove the AR entry and record the cash.
6. It's gone. AR is now zero for that invoice. The money is in your bank.

The entire cycle – from invoicing to payment – affects your cash flow. If you're working on Net 60 terms but need to pay your suppliers on Net 30, you've got a 30-day gap where you're out of pocket.

Accounts receivable journal entries

When you invoice a customer, you record it as:

• Debit: Accounts Receivable £5,000
• Credit: Revenue £5,000

This recognises the revenue (you've earned it) and records the outstanding amount owed.

When they pay, you record:

• Debit: Cash £5,000
• Credit: Accounts Receivable £5,000

This removes the AR and brings in the cash. Your AR balance drops by £5,000.

If a customer never pays (bad debt), you eventually write it off:

• Debit: Bad Debt Expense £5,000
• Credit: Accounts Receivable £5,000

This removes the uncollectible amount from your books.

Accounts receivable vs accounts payable

Accounts receivable is money customers owe you. Accounts payable is money you owe your suppliers. It's the inverse. You have thousands in AR? Your supplier has thousands in AP (from their perspective, from you).

Both affect cash flow, but differently. High AR means you're waiting to collect money. High AP means you have breathing room before paying out. For more on this, see the difference between accounts receivable and accounts payable.

Accounts receivable on the balance sheet

On your balance sheet, AR appears under Current Assets. It's listed separately from cash because it's not cash yet – it's a promise to receive cash within the year.

Your current assets typically look like:

Current Assets

• Cash: £20,000
• Accounts Receivable: £15,000
• Stock: £10,000
• Total Current Assets: £45,000

AR is part of your working capital. The more AR you have, the more capital is tied up waiting for customers to pay. This is why businesses worry about AR – it's real money your business needs, just not yet in the bank.

The accounts receivable turnover ratio

The AR turnover ratio tells you how efficiently you're collecting money. It answers: how many times a year do you collect your receivables?

Turnover ratio formula and worked example

Formula: Net Sales / Average Accounts Receivable

Example:

Your business had £500,000 in annual sales. Your AR balance was £50,000 at the start of the year and £40,000 at the end. Average AR is £45,000.

Turnover Ratio = £500,000 / £45,000 = 11.1

This means you collected your receivables 11.1 times in the year. Not bad.

A higher ratio means faster collection. A lower ratio means you're waiting longer for payment. What's "good" depends on your industry, but 8–15 is typical for most UK businesses.

Average collection period

This flips the ratio on its head. It tells you: on average, how many days does it take to collect payment?

Formula: 365 / AR Turnover Ratio

Using our example: 365 / 11.1 = 32.9 days

So on average, you're waiting about 33 days to collect. If your payment terms are Net 30, this is reasonable. If they're Net 60, you're collecting faster than expected (which is good). If they're Net 30 but you're at 45 days, you've got a collection problem.

What is accounts receivable financing?

When AR ties up too much cash, you have options. Invoice finance lets you sell your unpaid invoices to a lender for immediate cash. You get 70–95% of the invoice value upfront. Once your customer pays, the lender takes their cut and you get the remainder.

This suits businesses with strong sales but long payment terms. Contractors, wholesalers, and exporters often use it. It's not free – you pay fees – but it solves the cash flow gap.

To manage outgoings while you wait to be paid, FlexiPay lets you spread costs into fixed installments. It doesn't release cash from AR directly, but it gives you flexibility to manage cash flow while you're waiting.

When it may and may not suit a business

Invoice finance works well if:

• You have consistent, healthy invoices
• Your customers have good credit
• You need immediate cash to operate

It doesn't work if:

• Your invoices are small or irregular
• Your customers often default
• Your margins are too thin to absorb fees

How to manage accounts receivable

• Set clear payment terms. Net 30 is standard. Don't offer Net 60 unless you have to – it doubles your waiting time.
• Invoice promptly. The moment you complete work, invoice. The longer you wait, the longer the AR sits.
• Follow up early. Don't wait until Day 45 to chase a Day 30 invoice. Send a reminder on Day 28. Many late payments are just oversights.
• Use an ageing report. Track which invoices are current, 30 days overdue, 60 days overdue, etc. This tells you where to focus effort.
• Offer discounts for early payment. A 2% discount for payment within 10 days often accelerates cash flow.
• Review credit before invoicing. Know who you're lending to. A credit check costs little and prevents bad debts.

FAQs

Is accounts receivable a debit or a credit?

Accounts receivable is a debit. When you invoice, you debit AR (increase the asset) and credit revenue. When you're paid, you debit cash and credit AR (decrease the asset).

Does accounts receivable count as revenue?

No. Revenue is recorded when you deliver (or invoice), regardless of payment. AR is the outstanding portion. If you invoice £5,000, you record £5,000 in revenue immediately. The £5,000 in AR is just tracking that you haven't received the cash yet.

What is a good accounts receivable turnover ratio?

It depends on your industry and terms. Most UK businesses operate between 8 and 15. Retail might be higher (faster payment). Wholesale or construction might be lower (longer terms). The key is consistency. If your ratio drops sharply, it signals a collection problem.

What is the difference between accounts receivable and accounts payable?

AR is money customers owe you. AP is money you owe suppliers. AR is an asset on your balance sheet. AP is a liability. High AR ties up your cash. High AP gives you breathing room.

Related reading

• The difference between accounts receivable and accounts payable
• Invoice factoring vs invoice discounting
• A guide to cash flow

Disclaimer

18/08/2026 – While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.