Accounts Receivable
Accounts receivable is the money customers owe a business for goods or services already delivered on credit but not yet paid for. It sits under current assets on the balance sheet as trade receivables. It matters because it is cash the business has earned but not yet collected — the faster it turns into money, the healthier the firm's working capital and the lower its risk of bad debts.
What Is Accounts Receivable?
Accounts receivable, also called trade receivables or sundry debtors, is the sum of unpaid customer invoices. When a business sells on credit, it recognises the revenue at once and books a receivable that stays on the balance sheet until the customer pays. It is a genuine asset because it represents a right to future cash, but it is only as good as the customer's willingness and ability to pay.
A Chennai IT services firm meets receivables the moment it invoices a client on 30- or 45-day terms. The art is in collection: money tied up in debtors is money not in the bank, so a firm with slow-paying clients can be profitable on paper yet short of cash. Ageing the receivables, chasing overdue accounts and providing for doubtful debts are what keep this asset from quietly turning into a loss.
Key terms
- Cost of Goods Sold — The cost behind the credit sales that create receivables.
- Depreciation — A non-cash charge, unlike the real cash a receivable represents.
- Fixed Assets — Long-life assets, contrasted with short-term receivables.
What Goes Into Accounts Receivable
Trade receivables gather the amounts customers owe for the firm's ordinary sales; some items belong and some do not:
- Trade debtors — Amounts owed by customers for goods or services sold on credit.
- Unbilled revenue — Work performed but not yet invoiced, recognised so the asset is complete.
- Less: provision for doubtful debts — An estimate of receivables unlikely to be collected, netted off.
- Less: bad debts written off — Amounts judged uncollectible and removed from the ledger.
- Excluded — advances and loans — Staff advances and loans given are separate; only trade dues are receivables.
How Accounts Receivable Works in the Books
A receivable runs from sale to collection through a tracked cycle:
- 1Raise the credit invoice
Goods or services are delivered and a tax invoice is issued to the customer on credit terms.
- 2Record the receivable
The customer account is debited and sales plus output GST are credited, creating the asset.
- 3Age the debtors
At period-end the accountant buckets receivables by age to spot overdue accounts.
- 4Chase and provide
Overdue accounts are followed up, and a provision is raised for those unlikely to pay.
- 5Collect and clear
On receipt, cash is debited and the receivable credited, converting the asset to cash.
Accounts Receivable: A Practical Example
| Particulars | Amount (INR) | Treatment |
|---|---|---|
| Services invoiced on 45-day credit | 10,00,000 | Receivable created |
| Output GST (18%) | 1,80,000 | Liability, collected with the invoice |
| Provision for a doubtful client | 1,00,000 | Netted against receivables |
| Net receivables shown | 10,80,000 | Gross 11,80,000 less 1,00,000 provision |
A Chennai IT firm invoices ₹10,00,000 plus ₹1,80,000 GST on 45-day terms. One client, ₹1,00,000 of the total, has a history of delays, so the firm raises a provision for doubtful debts against it. Net receivables of ₹10,80,000 then reflect what the firm realistically expects to collect. Ageing this balance each month shows the finance team which invoices to chase before they slide into bad debt.
flow and bad-debt risk:
Accounts Receivable Under Indian Accounting Rules
Trade receivables are presented under current assets in Schedule III of the Companies Act 2013, which since the MCA amendment effective 1 April 2021 requires a trade-receivables ageing schedule. Revenue behind the receivable is recognised under AS 9 or Ind AS 115. Impairment follows general prudence and doubtful-debt provisioning under Accounting Standards, or the expected credit loss model of Ind AS 109 for Ind AS entities. For income tax, a bad debt written off in the books is generally deductible under Section 36(1)(vii) of the Income Tax Act 1961.
- Schedule III, Companies Act 2013 — Presents trade receivables and the mandatory ageing schedule.
- AS 9 / Ind AS 115 — Governs recognition of the revenue that creates the receivable.
- Section 36(1)(vii), Income Tax Act — Allows a deduction for bad debts actually written off in the books.
Common Mistakes With Accounts Receivable
Receivable errors hide cash-flow and bad-debt risk:
- Carrying debtors at full value — Ignoring doubtful accounts overstates the asset and profit → raise a provision for doubtful debts.
- Not ageing receivables — Watching only the total misses which invoices are overdue → age debtors monthly and chase early.
- Recognising revenue but not collecting — Booking sales without a collection process ties up cash → pair invoicing with active follow-up.
- Never writing off dead debts — Leaving uncollectible amounts on the books flatters assets and blocks the tax deduction → write off genuine bad debts.
Accounts receivable is the money customers owe a business for goods or services already delivered on credit but not yet paid for. It sits under current assets on the balance sheet as trade receivables. It matters because it is cash the business has earned but not yet collected — the faster it turns into money, the healthier the firm's working capital and the lower its risk of bad debts.
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Applicable framework: Companies Act 2013 (Schedule III), AS 9 / Ind AS 115, Income Tax Act 1961 (Section 36(1)(vii)). For general information only, not professional advice. Verify the current position for your entity before acting.