What Are Accounts Receivable?

Accounts receivable, known as trade debtors in UK terminology, represent the amounts owed to a business by its customers for goods or services delivered on credit. They appear as a current asset on the balance sheet and are a key component of working capital management.

For most trading businesses, accounts receivable are one of the largest assets on the balance sheet, making their proper management critical to cash flow and financial health.

How Accounts Receivable Arise

When a business sells goods or services on credit terms rather than for immediate payment, an accounts receivable balance is created. The typical cycle runs:

1. Goods or services are delivered to the customer
2. An invoice is raised with agreed payment terms (commonly 30 days in the UK)
3. The invoice amount is recorded as accounts receivable
4. The customer pays within the credit period
5. The receivable is cleared against the bank receipt

The Journal Entry for a Credit Sale

When a UK company sells goods for £2,000 plus 20% VAT:

The receivable includes the VAT because the customer owes the full invoice amount. The business must account for the output VAT to HMRC regardless of whether the customer has paid. For a deeper look at how these entries work, see the guide to journal entries .

Accounts Receivable on the Balance Sheet

Under FRS 102, accounts receivable are classified as a current asset within debtors on the balance sheet. They are presented net of any allowance for doubtful debts.

The allowance for doubtful debts reflects the estimated amount that the business does not expect to collect. This is closely related to bad debt accounting.

Credit Terms and Payment Conditions

UK businesses set credit terms based on industry norms, customer relationships, and risk appetite. Common arrangements include:

Late Payment Legislation

The Late Payment of Commercial Debts (Interest) Act 1998 gives UK businesses the statutory right to charge interest on overdue invoices at 8% above the Bank of England base rate, plus a fixed sum depending on the debt size:

Credit Control

Effective credit control is the process of managing accounts receivable to minimise the risk of non-payment and optimise cash flow.

Before Extending Credit

• Credit checks: Run credit reports through agencies such as Experian, Equifax, or Companies House filing history
• Credit limits: Set maximum exposure per customer based on their creditworthiness
• Terms and conditions: Establish clear payment terms in writing
• Trade references: Request references from other suppliers

Ongoing Management

• Invoice promptly: Issue invoices as soon as goods or services are delivered
• Statement runs: Send monthly statements to customers showing outstanding balances
• Chasing overdue debts: Follow a structured process of reminders, phone calls, and formal letters
• Escalation: Refer persistent non-payers to a debt collection agency or solicitor

Ageing Analysis

An ageing analysis (also called an aged debtors report) groups outstanding receivables by how long they have been overdue. This is one of the most important tools for credit control.

The longer a debt remains unpaid, the less likely it is to be collected. Research consistently shows that debts over 90 days overdue have a significantly higher risk of becoming irrecoverable.

Allowance for Doubtful Debts

Under FRS 102, a business must recognise an allowance for doubtful debts (also called a provision for bad debts) when there is objective evidence that some receivables will not be collected in full.

Methods of Estimation

Specific provision: Reviewing individual debtor accounts and providing against those where payment is in doubt. For example, if a customer enters administration, the full balance would typically be provided against.

General provision: Applying a percentage to the total receivables or to aged categories based on historical experience:

Journal Entry for Doubtful Debt Provision

This reduces the net receivables on the balance sheet and recognises the estimated loss in the income statement .

Writing Off Bad Debts

When a debt is confirmed as irrecoverable, it is written off against the allowance or directly to the income statement . See the detailed guide on bad debt for the full process.

VAT Bad Debt Relief

If a debt remains unpaid for six months after the later of the due date or the date of supply, and the debt has been written off in the accounts, the business can reclaim the output VAT previously paid to HMRC. This is known as VAT bad debt relief and must be claimed on the VAT return for the period in which the six-month condition is met.

Key Ratios for Accounts Receivable

Debtor Days (Days Sales Outstanding)

Debtor days measures the average number of days it takes to collect payment:

Debtor Days = (Trade Debtors / Annual Credit Sales) x 365

Lower debtor days indicate more efficient collection. The figure should be compared against the standard credit terms offered. If terms are Net 30 but debtor days are 58, customers are paying almost a month late on average.

Receivables Turnover Ratio

Receivables Turnover = Annual Credit Sales / Average Trade Debtors

A higher ratio indicates faster collection. This metric complements debtor days and is useful for trend analysis.

Accounts Receivable and Cash Flow

Accounts receivable represent sales that have been recognised in the income statement but not yet converted to cash. A growing receivables balance, if not matched by growing sales, indicates a deterioration in collection performance.

The cash flow statement adjusts operating profit for changes in receivables:

• An increase in receivables reduces operating cash flow (more cash is tied up)
• A decrease in receivables increases operating cash flow (cash is being released)

Effective management of accounts receivable is a cornerstone of financial management .

Factoring and Invoice Finance

Some UK businesses use invoice finance to accelerate cash collection from receivables:

Factoring

The business sells its invoices to a factoring company, which advances typically 80-90% of the invoice value immediately. The factor collects payment from the customer and remits the balance, less fees.

Invoice Discounting

Similar to factoring, but the business retains responsibility for collecting payment. The finance provider advances funds against the receivable book. This is confidential; the customer is unaware of the arrangement.

Accounting Treatment

Under FRS 102, whether the receivable is derecognised depends on whether the risks and rewards of ownership have been transferred. If the factor has full recourse to the business for non-payment, the receivable remains on the balance sheet with a corresponding liability .

Companies House and Disclosure

Companies filing accounts at Companies House must disclose trade debtors within the notes to the accounts. For medium and large companies, this includes:

• The total of trade debtors
• Amounts falling due after more than one year
• Any amounts owed by group undertakings or related parties
• The accounting policy for recognising bad and doubtful debts

Small companies filing under the small companies regime have reduced disclosure requirements but must still show debtors as a line item on the balance sheet.