Concepts
Accounts receivable
Accounts receivable is the money customers owe your business for goods or services you have supplied and invoiced but have not yet been paid for.
Accounts receivable, sometimes called debtors, is the total amount that customers owe you for sales made on credit. When you issue an invoice with payment terms, the amount is recorded as an asset until it is paid. In accounting software, accounts receivable is typically a control account backed by a list of unpaid invoices, each showing the customer, date, amount and due date.
Receivables are tied to cash flow. A business can have strong sales but still run out of money if customers delay payment. Many small businesses use an ageing report, which lists unpaid invoices by how overdue they are, to focus their follow-up. Clear payment terms, prompt invoicing, reminders and, where needed, deposits or progress payments are common methods for reducing the risk.
GST connects directly to receivables. If you account for GST on an accruals basis, you generally owe GST on a sale in the period in which you issue the invoice or receive payment, whichever is earlier. That means you may need to pay GST to the ATO before the customer pays you. If you use cash accounting for GST, GST is reported in the period you receive payment. Understanding which method you use helps you plan for the BAS.
If a customer never pays, you may have a bad debt. For income tax, a bad debt can be deductible when it has been written off as bad in the relevant period, if the amount was previously included in assessable income. For GST, a bad debt adjustment may allow you to recover the GST previously paid if the debt has been written off as bad and the other conditions are met, which includes the debt being overdue for a period set by the legislation.
Good records are important. Your invoice needs to be a valid tax invoice if the buyer is GST-registered and wants to claim a credit, and for sales of $1,000 or more it must also identify the buyer. Keep copies of invoices, correspondence about overdue accounts and evidence of the steps you took to recover the debt. These records support any later write-off and any GST adjustment.
A common misunderstanding is that you do not owe GST until you are paid. That depends on your accounting method. Another is writing off debts too casually, which can raise questions in a review if the steps taken were not documented. Regular follow-up, credit checks for large customers and clear terms are practical ways to reduce write-offs. This is general information only, so confirm how this applies to you with the ATO or a registered tax professional.
Worked example
A web designer invoices a client $13,200 including $1,200 GST on 10 May, with payment due in 30 days. On accrual accounting, the $1,200 GST goes in the quarter ending 30 June. If the client does not pay and she writes the debt off as bad in a later period, she may be able to make a bad debt adjustment for the $1,200 GST, subject to the conditions.
Practical tips
- Send invoices promptly and follow up overdue accounts on a regular schedule.
- Know whether you account for GST on a cash or accrual basis, since it decides when the GST on a sale is due.
- Document the steps you take to recover a debt before writing it off.