What are receivables?

A receivable is recognised when the goods are delivered or the service performed, at the invoice amount less any trade discounts, returns or rebates: debit trade receivable, credit sales revenue. Short-term receivables are then carried at that amount less an allowance for credit losses, with the gross figure and the allowance disclosed in the notes.

AASB 9 requires an expected credit loss (ECL) approach. Most trade receivables use the simplified method: lifetime ECL from day one, without tracking changes in credit risk. In practice you apply historical loss rates to each ageing bucket, book the total as bad debt expense against an allowance for doubtful accounts, and write a confirmed bad debt off against that allowance.

Good collections start before the sale: set credit criteria, run credit checks, apply limits and review them. Invoice promptly with clear terms, due dates and payment options such as BPAY, direct debit and card, automate reminders, log disputes separately with an owner, and escalate in steps from internal follow-up to a demand letter and then debt collection or legal action.

Measure the result with days sales outstanding: average receivables divided by credit sales, multiplied by the days in the period. Average receivables of $150,000 on annual credit sales of $1,200,000 gives 45.6 days. Track the ageing buckets (0 to 30, 31 to 60, 61 to 90, 90 plus), the collection rate and the bad debt ratio. A rising DSO or a growing share in the older buckets means collections are weakening and provisions will rise.

Receivables drive the cash conversion cycle: the longer customers take to pay, the more working capital the business has to fund. Shorter customer terms, early-payment discounts, direct debit for recurring invoices and progress payments on long jobs all bring cash in sooner, while longer supplier terms push cash out later.

When the book grows faster than collections, invoice finance or factoring converts invoices to cash, an overdraft or line of credit smooths the gaps, and trade credit insurance covers customer failure. Keep in mind that the current and quick ratios are only as good as the receivables behind them, so realistic allowances matter.

A provision for doubtful debts is an accounting estimate and is generally not deductible on its own. The ATO generally allows a deduction only once a debt is bad, irrecoverable and actually written off in your books, and only for an amount you have already included in your assessable income, in that income year or an earlier one. The write-off has to happen before the end of the income year you claim it in, so keep evidence of the credit assessment, the collection attempts and the write-off decision.

If you account for GST on a non-cash basis, you can also claim a decreasing adjustment for the GST on a bad debt once it is written off or is 12 months or more overdue, with an increasing adjustment if you later recover it. If a customer enters external administration, recovery may be limited and ASIC's insolvency guidance sets out where creditors stand.