What Does Accounts Receivable Mean? A Simple Guide


When you’re running a business, there are a lot of terms that you may not be familiar with. It can often be confusing to a new business owner, especially when you’ve never had to deal with anything accounting-related in business.


One of the terms you will come across is accounts receivable. But, what does it mean? For the short answer, it means getting paid for your goods and services. When you’re running a business and you want to understand all of the key terms to ensuring your bookkeeping is under control, it’s important to understand what accounts receivable means to you.


What are accounts receivable?

Whenever you send an invoice (or, a bill) to a client or a customer, this is referred to as accounts receivable. It is any money that is owed to you. This money becomes a part of your accounts receivable until it is paid.


When money is both owed and in the process of being collected, this is all referred to as accounts receivable. This process includes everything from providing an invoice to a client and waiting for it to be paid, right through to taking steps to chase payments and match your payments to your invoices. This process is also known as bills receivable and often, people will just refer to this phase as “invoicing”.


Is accounts receivable classed as an asset?

Because accounts receivable refers to money that is owed to you, this classifies it as an asset. Because of this, invoices are considered quite valuable, which is why there are companies out there who are willing to buy your invoices.


However, once your invoice is paid by your customer or client, it is no longer an asset. This is when it is simply treated as cash in your bank. This is, though, much better. Receiving the money that is owed to you is always a good outcome. After all, if an invoice isn’t ever paid, it’s ultimately written off as bad debt. Therefore, once an invoice is written off, it is no longer an asset.

What is bad debt?

If you have an invoice that has been waiting to be paid for some time (also known as aged accounts receivable), this is when you may need to consider writing it off as bad debt. Bad debt is, simply put, lost income. It’s always important to record bad debt as you may have already paid tax on this amount, depending on your personal business circumstances. By recording your bad debts, you can claim this tax back. Always be sure to record all invoices, unpaid invoices and eventually, bad debt due to unpaid invoices.


When is it time to write off a bad debt?

If you believe there is no reasonable chance of being paid, it’s time to write it off as a bad debt. There may be some circumstances out of your control, such as their company going broke. Or, you simply may be in the middle of a dispute with them which you feel you just cannot resolve. If this is the case, write off your invoice as a bad debt.


But, if you do, this doesn’t mean you should give up on reminding them to pay you. Be persistent and continue to remind them to pay your invoice. Even after you have written off the debt, if they eventually pay you, you can always declare the income on your next tax return.


Why is keeping track of your business finances important?

Getting paid keeps your business running. If you’re not getting paid, it makes it harder for you to pay your suppliers and pay your staff.

If you’re in need of assistance with all of your bookkeeping needs throughout Brisbane and Townsville, get in touch with the team at Diverse Business Consultants. We can help you keep your records organised throughout the whole year.