What is Accounts Receivable?

What is accounts receivable?

Let's start by saying that Trade Debtors and Accounts Receivable are EXACTLY the same things - the words can be used 100% interchangeably.

So you might have seen one of these terms in the balance sheet for your business (which either you will get from your bookkeeping software or your accountant or bookkeeper might have sent you over).

Here is an example of what the balance sheet looks like and you can see I have highlighted where Accounts Receivable (Trade Debtors) appears:

Accounts Receivable sits in the current assets section of the Balance Sheet.

It is the amount of money that is owed to your business from your customers or clients at a particular point in time.

The Balance Sheet is a snapshot in time - so above we are showing it at 30th April 2018 - that means that as at 30th April 2018, the number shown is the amount of money that this company has owned to it, by its customers/clients.

Usually, when we see the businesses Balance Sheet, we also look at the Accounts Receivable report (or Trade Debtors report) - this can also be called Aged Receivables, or Aged Debtors.

And that report should be looked at, at least monthly (which is also the frequency that it is useful to look at the Balance Sheet too).

This is an example of the Aged Receivables report:

You can see that this report has the months listed at the top:

But in some software we see it with this format where it's listed as the number of days that the invoice is overdue:

Regardless of which format you have - you can see that this report shows a summary of the debts that are owed to you - and if more than one invoice is owed from a particular client in the same month, they are grouped together.

So let's say that client 1 owes you 2 invoices for March - it is the total of both of those invoices that will be shown under March.

Now in an ideal world, we'd have no one appearing in this report and everyone would pay their invoice on time, or early! But, of course, even if you are delivering an amazing service - people still pay late - so it's important to be on top of this number and work to minimise it by chasing up debts and making sure that the total of this report, at best, stays roughly the same, but ideally decreases over time.

Let me know if you have any questions in the comments

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