In one sentence
Accounts receivable is the money customers owe a business for goods or services already delivered on credit — a current asset on the balance sheet and, until collected, an interest-free loan to the customer.
Key takeaways
- Accounts receivable is the money customers owe you for goods or services already delivered on credit — an asset on your balance sheet, and cash you do not yet have.
- The accounts receivable process runs from credit decision to invoice to follow-up to cash, and it fails at the step nobody owns.
- Three numbers describe a receivables book: days sales outstanding, the ageing schedule, and the concentration of the overdue balance in a few accounts.
- Managing receivables well is about ownership and consequence; the invoice that costs the customer nothing to ignore is the one that ages.
What accounts receivable means (and what trade receivables means)
Accounts receivable — trade receivables, debtors, AR — is the total your customers owe you for goods or services you have already delivered and invoiced on credit terms. Trade receivables is the balance-sheet name for the same thing: amounts receivable from customers in the ordinary course of trade, as distinct from other receivables such as advances or deposits. Trade receivables are a current asset, because it is expected to become cash within the operating cycle. It is also, from the day the invoice is raised, a loan you have made to your customer at zero interest.
The distinction that matters in practice is between receivables that are current (inside the agreed credit period), overdue (past it), and doubtful (unlikely to be collected in full). A receivables book is healthy or not depending on how much of it sits in the second and third categories, and for how long.
Accounts receivable and accounts payable
Receivables are what customers owe you; payables are what you owe suppliers. Every invoice is a receivable on one balance sheet and a payable on another. A business with long receivables and short payables funds its customers from its own borrowings — which is why days sales outstanding matters more than the size of the book.
The accounts receivable process
- Credit decision. Whether to sell on credit, on what terms, up to what limit — the credit control stage.
- Invoice. Raised promptly, accurately, with the documents the customer's payables team will need: purchase order reference, delivery proof, tax details. An invoice that needs correcting is an invoice that will be paid late.
- Monitoring. The ageing schedule reviewed weekly: what is current, what is overdue, who is late, and by how much.
- Follow-up. Statements and reminders on a schedule, promises to pay recorded with dates, disputes logged with an owner. See payment follow-up emails that get paid.
- Escalation. A consequence when a promise is broken — a credit hold on new orders, a formal notice — and, when the account has gone bad, third-party recovery with the file attached.
- Cash application and reconciliation. Receipts matched to invoices, short payments and deductions identified and pursued or credited, so the ledger reflects what is actually owed.
The numbers that describe a receivables book
Days sales outstanding — the average number of days from sale to cash; the formula and the levers are in the DSO guide. The ageing schedule — receivables bucketed by days overdue (current, 1–30, 31–60, 61–90, 90+), which shows the shape DSO hides. Concentration — what share of the overdue balance sits with the ten largest debtors; if it is most of it, the problem is ten conversations, not a process. Receivables turnover — credit sales divided by average receivables, the same information as DSO expressed as a rate.
How medium and large Indian businesses manage receivables
The pattern we see most is not a lack of process but a lack of ownership: collection sits with the salesperson who needs next month's order, promises are verbal, disputes have no owner, and an overdue invoice costs the customer nothing. The fixes are structural. One owner whose only job is collection. Every promise recorded with a date. Every dispute with a name and a visible age. Proof of delivery that cannot be argued with. And a cost to being overdue — a credit block on new orders past the limit, sales incentives on collected rather than billed revenue. That is what the DSO Reduction Programme installs, and it is why DSO comes down without reminders getting louder.
When receivables become bad debt
A receivable becomes doubtful when the customer stops responding, disputes everything, or shows signs of distress; it becomes bad debt when it is written off. Before writing off, validate whether the debtor is still operating and whether an enforcement route exists — many "bad debts" are simply receivables nobody pursued properly. Recovery exists for the space between the reminder and the write-off.
Sources and regulation
| Instrument | What it does | Source |
|---|---|---|
| Ind AS 115 / AS 9 | When revenue — and therefore a receivable — is recognised | mca.gov.in |
| Ind AS 109 | Expected credit loss provisioning on receivables | mca.gov.in |
| Companies Act, 2013 — Schedule III | Disclosure of trade receivables by ageing in the balance sheet | mca.gov.in |
| MSMED Act, 2006 — Sections 15–16 | Payment within 45 days where the supplier is a registered MSME; interest on delay | msme.gov.in |
Thresholds, limitation periods and procedures change. This guide describes the position as generally understood at the time of writing and is not legal advice; confirm the current rule before acting.
If this is your situation: your receivables are slipping and nobody owns the number.
The DSO Reduction Programme