Learn It
Accounts Receivable (often called A/R) is an asset account. It represents money that customers owe the business for work already done or products already delivered. Every time you send an invoice, A/R goes up. Every time a customer pays, A/R goes down.
As we saw in the Sales and Revenue lesson, an invoice creates revenue and A/R at the same time. When the payment arrives later, it does not create new revenue — it simply converts A/R into cash.
Think of A/R as a holding account. It holds the value of work the business has earned but not yet collected. The faster it turns into cash, the healthier the business.
Invoices and Customer Balances
Each customer who buys on credit has a customer balance — the total of all their unpaid invoices. The bookkeeper tracks these balances individually. The total of all customer balances equals the Accounts Receivable balance on the books.
When a customer's invoice is paid in full, their balance goes to zero. When they have multiple invoices, each payment must be applied to a specific invoice so the records show which ones are open and which are closed.
Receiving and Applying Payments
When a payment arrives, the bookkeeper does two things: records the cash coming in and reduces the customer's A/R balance. But there is a third step that matters: applying the payment to the right invoice.
If a customer has three open invoices and sends one check, the bookkeeper must decide which invoice the payment goes against. Usually it is the oldest one, or the one the customer specifies. Applying payments correctly keeps the customer's ledger clean and accurate.
Partial Payments
A customer does not have to pay the full amount at once. If they owe $1,000 and send $400, that is a partial payment. A/R drops by $400, cash goes up by $400, and the customer still owes $600. The invoice stays partially open until the remainder is collected.
Customer Credits and Overpayments
A customer credit is a negative balance on a customer's account. It can happen when a customer overpays an invoice, returns something after paying, or receives a credit memo. The business owes the customer either a refund or a credit toward a future invoice.
An overpayment is when a customer pays more than they owe. If an invoice is $500 and the customer sends $600, the extra $100 becomes a credit on their account. It is not revenue — the business has not earned it. It sits there until it is refunded or applied to the next invoice.
Aging and Overdue Receivables
Not every invoice gets paid on time. An aging report groups unpaid invoices by how long they have been outstanding. Common buckets are:
Current
Not yet past due (within terms)
1–30 Days Past Due
Overdue by 1 to 30 days
31–60 Days Past Due
Overdue by 31 to 60 days
61+ Days Past Due
Overdue by more than 60 days
The aging report tells the business which customers are falling behind. The older an invoice gets, the less likely it is to be collected. A bookkeeper uses the aging report to decide which customers need a follow-up call or reminder.
Write-Offs
Sometimes an invoice will never be collected. The customer went out of business, disputed the charge, or simply stopped responding. When the business decides an invoice is uncollectible, it may write off the amount.
A write-off removes the amount from Accounts Receivable. It does not mean the customer no longer owes the money — it means the business has decided to stop expecting to collect it. The entry reduces A/R and records a bad debt expense. At an introductory level, just know that write-offs clean up the A/R aging so it shows only amounts the business realistically expects to collect.
Common A/R Mistakes
Recording a payment but not applying it to an invoice — this leaves unapplied payments sitting on the customer's account.
Recording a customer payment as revenue instead of reducing A/R — this double-counts revenue that was already recorded.
Forgetting to apply customer credits before sending a new invoice — the customer is billed for more than they actually owe.
Not following up on aging invoices — the longer they sit, the harder they are to collect.
Writing off an invoice without documenting why — the decision should always have a record.
See It
Here is a small customer ledger for a landscaping business. Four customers, each with one invoice. Some have paid in full, some partially, and one has a credit. The aging report is prepared as of April 30 with Net 30 terms.
| Customer | Invoice Date | Invoice | Paid | Credit | Balance |
|---|---|---|---|---|---|
| Acme Lawn Co. | Mar 5 | $800 | $800 | $0 | $0 |
| Bright Gardens | Mar 20 | $1,200 | $0 | $0 | $1,200 |
| Corner Cafe | Apr 10 | $600 | $300 | $0 | $300 |
| Davis Design | Apr 25 | $500 | $0 | $100 | $400 |
| Total A/R | $1,900 | ||||
The aging report as of April 30 (Net 30 terms):
| Aging Bucket | Amount |
|---|---|
| Current | $700 |
| 1–30 Days Past Due | $0 |
| 31–60 Days Past Due | $1,200 |
| Total | $1,900 |
Bright Gardens is the concern. Their $1,200 invoice from March 20 is 41 days old — past the 30-day terms and into the 31–60 bucket. The bookkeeper should follow up. Corner Cafe and Davis Design are still within terms. Acme Lawn is fully paid.
Do It
Now it is your turn. Calculate each customer's ending balance from the ledger, then place each unpaid amount into the correct aging bucket. Type the numbers yourself. The total of all customer balances should equal the total of the aging buckets.
Do It — Customer Balances and Aging
Below is a small customer ledger for a landscaping business. Each customer has one invoice, a payment received, and possibly a credit. Your job is to:
- Calculate each customer's ending balance and type it in.
- Complete the A/R aging table as of April 30.
Terms are Net 30 (payment due within 30 days of the invoice date). Use the invoice date to calculate how many days past due each unpaid balance is as of April 30.
| Customer | Invoice Date | Invoice | Payment | Credit | Balance (type) |
|---|---|---|---|---|---|
| Acme Lawn Co. | Mar 5 | $800 | $800 | $0 | $ |
| Bright Gardens | Mar 20 | $1,200 | $0 | $0 | $ |
| Corner Cafe | Apr 10 | $600 | $300 | $0 | $ |
| Davis Design | Apr 25 | $500 | $0 | $100 | $ |
| Total A/R (your balances) | $0 | ||||
A/R Aging Report — As of April 30
Type each customer's unpaid balance into the correct aging bucket. Days past due = April 30 minus invoice date, minus 30-day terms.
Prove It
Answer each question, then read the explanation. There's no score — this is just to help the ideas stick.
Question 1
A customer has a $1,000 invoice and sends a $400 partial payment. What happens to Accounts Receivable?
Question 2
What is the purpose of an aging report?
Question 3
A customer overpays an invoice by $100. What is the result?
Key Takeaways
- Accounts Receivable is an asset — money customers owe for work already done.
- Invoices create A/R. Payments reduce A/R and increase cash. Revenue does not change when a payment is received.
- Payments must be applied to specific invoices to keep customer ledgers accurate.
- Partial payments reduce the balance but do not close the invoice.
- Customer credits and overpayments are not revenue — they are obligations to the customer.
- An aging report groups unpaid invoices by how long they have been outstanding, showing which customers need follow-up.
- The total of all customer balances always equals the total Accounts Receivable on the books.