Accounts Receivable Accounting

What is accounts receivable accounting?

Accounts receivable accounting (in German Debitorenbuchhaltung) is the part of financial accounting that records all of a company's receivables from its customers, monitors them and follows them until settlement. Debtors (Debitoren) are customers who have received a service but have not yet paid. A separate personal account is kept for each of them.

It is a subledger of bookkeeping: the details per customer are kept there, and the general ledger shows only the total on the control account trade receivables. The sum of all customer accounts must therefore equal the balance of this control account. The counterpart for supplier invoices is accounts payable accounting. Because capital is tied up between invoice and payment, accounts receivable accounting has a direct effect on liquidity and on working capital, the capital tied up in the ongoing business. In due diligence and purchase price negotiation, it shows whether reported revenue was actually paid.

Tasks of accounts receivable accounting from invoice to payment

• Master data and credit limit: invoice address, payment term (the agreed period between invoice and payment) and credit limit per customer, supported by a check of creditworthiness before larger orders.
• Invoicing: promptly after the service, with the mandatory particulars of Section 14(4) of the German VAT Act (Umsatzsteuergesetz, UStG) and, towards businesses, at the latest six months after the service (Section 14(2) UStG). Between domestic businesses, the structured e-invoice becomes mandatory, a machine-readable data set instead of a plain PDF file. Under the transitional rules this applies from 2027, and from 2028 for businesses with prior-year revenue of up to EUR 800,000 (as of 2026).
• Payment allocation: settlement of open items, that is, invoices not yet paid, and clarification of part payments, unjustified cash discount deductions (price reduction for prompt payment) and credit notes.
• Dunning: staged reminders and dunning letters at a fixed rhythm, followed by court dunning proceedings or debt collection.
• Monitoring and valuation: open items list by due date, reconciliation with the control account and valuation allowances at the reporting date.

A customer falls into payment delay if it does not pay in response to a reminder sent after the due date. If the contract fixes a payment date by the calendar, its expiry is sufficient (Section 286(2) no. 1 of the German Civil Code, BGB). Business customers fall into default at the latest 30 days after the due date and receipt of the invoice (Section 286(3) BGB). Against businesses, default interest is nine percentage points above the base interest rate, plus a flat fee of EUR 40 (Section 288(2) and (5) BGB). To enforce these claims, due date, receipt of the invoice and reminders must be documented.

Metrics: days sales outstanding and ageing structure

Days sales outstanding (DSO) indicates how many days a sale remains open on average until payment.

Formula: days sales outstanding (DSO) = trade receivables ÷ gross revenue of the period × days in the period

Revenue is taken gross because the receivables contain VAT, whereas revenue is booked net. Together with inventory days and the supplier payment term, days sales outstanding determines the cash conversion cycle, that is, the time between paying suppliers and receiving payment from customers.

More informative than the average is the ageing structure of the open items. It divides the receivables into not yet due and 1 to 30, 31 to 60, 61 to 90 and more than 90 days overdue. In addition, concentration on the largest customers and past defaults are considered. If a large part of the receivables falls on a few customers, their payment behaviour becomes a liquidity risk for the company.

Valuation: specific and general valuation allowances

Receivables belong to current assets. The strict lower of cost or market principle applies to them: if their value at the balance sheet date is below the invoice amount, for example because a default threatens, the lower value must be used (Section 253(4) of the German Commercial Code, HGB). For individual doubtful receivables, for example in the case of payment difficulties, an insolvency filing or a dispute about the service, the company forms a specific valuation allowance (Einzelwertberichtigung) equal to the expected default. For the general default risk of the remaining receivables, a general valuation allowance (Pauschalwertberichtigung) is added, the rate of which is derived from past defaults.

Both valuation allowances are calculated on the net amount without VAT. VAT is corrected only when the receivable is uncollectible (Section 17(2) no. 1 UStG); if payment nonetheless arrives later, a further correction is needed. In the tax balance sheet, writing down to the lower value (Teilwertabschreibung) requires an expected permanent impairment (Section 6(1) no. 2 sentence 2 of the German Income Tax Act, EStG). Default rates therefore have to be justified with empirical values.

Worked example: calculating days sales outstanding and valuation allowances

A software company with business customers achieves net revenue of EUR 4.8 million in the last twelve months, that is, EUR 5,712,000 including 19% VAT. A payment term of 30 days is agreed. At the reporting date, receivables of EUR 714,000 gross are open.

• Days sales outstanding: 714,000 ÷ 5,712,000 × 365 days = about 46 days
• Receivables if all customers paid on time after 30 days: 5,712,000 × 30 ÷ 365 = about EUR 469,500
• Liquidity released one-off: 714,000 minus 469,500 = about EUR 244,500
• Specific valuation allowance: A customer in payment difficulties owes EUR 59,500 gross, that is, EUR 50,000 net; with an expected default of 80%, EUR 40,000 has to be written down
• General valuation allowance: remaining receivables (714,000 minus 59,500) ÷ 1.19 = EUR 550,000 net; at a rate of 1% derived from empirical values, this gives EUR 5,500
• Balance sheet carrying amount: 714,000 minus 40,000 minus 5,500 = EUR 668,500

Customers pay on average about 16 days after the agreed term. The valuation allowances of EUR 45,500 in total reduce the result for the financial year, and VAT remains unaffected until the receivable is uncollectible. Faster payment, by contrast, does not affect the result but liquidity: it releases about EUR 244,500 once, without additional revenue or a loan being necessary.

Receivables in due diligence and purchase price

In due diligence, investors and buyers request the open items list with ageing structure as of the last reporting date. Monthly figures for the last one to two years are often added. The reviewers reconcile the list with the control account, follow the development of days sales outstanding and look for credit notes after the reporting date as well as receivables from shareholders or related persons. Agreements on factoring or credit insurance also belong in the data room.

In a company purchase, receivables are part of working capital, for which buyer and seller agree a normal level. Deviations at the closing date change the purchase price through a working capital adjustment. Heavily overdue items are often taken into account only at a discount or not at all. Quality shows in a stable days sales outstanding figure, a small overdue share, a documented dunning process and the absence of unallocated incoming payments.

Distinction: accounts receivable accounting, receivables management and factoring

• Receivables management: covers, besides accounting, credit checks, credit limits, security and customer communication. Accounts receivable accounting is its accounting core.
• Factoring: sale of receivables to a factor in return for immediate liquidity. In true factoring, the factor bears the default risk, and the receivable leaves the balance sheet.

Common mistakes

• Late invoices. Every day between service and invoice lengthens days sales outstanding, and dunning cannot make it up later.
• Individual payment terms in sales. If every sales employee grants their own terms, liquidity cannot be planned reliably.
• No valuation allowance on old items. Receivables overdue for months without an allowance overstate assets and result and stand out in every review.
• VAT in the valuation allowance. If the allowance is made on the gross amount, expense and carrying amount are wrong, because the tax is to be corrected only on uncollectibility.
• Incoming payments not allocated. If payments stay on a clearing account, the open items list continues to show paid invoices as open.
• Concentration overlooked. If a considerable part of the receivables depends on a single customer, its creditworthiness has to be monitored continuously.

Frequently asked questions

What days sales outstanding is appropriate?

One that is close to the agreed payment term. There is no universally valid figure, because industries and contracts provide for different terms. What matters is therefore the distance from the payment term: if days sales outstanding is far above it, customers regularly pay late or dunning takes effect too late.

What is the difference between accounts receivable and accounts payable accounting?

Accounts receivable accounting manages receivables from customers, that is, money owed to the company; accounts payable accounting manages liabilities to suppliers, that is, money it owes. The German names explain the difference: Debitor comes from the Latin debere (to owe), Kreditor from credere (to trust, to give credit). Both are subledgers with a personal account per business partner and, together with inventories, form the core of working capital.

When must a specific valuation allowance be formed?

As soon as there are concrete indications of a default. These include an insolvency filing by the customer, unsuccessful enforcement attempts, a serious dispute about the service or a long overdue period with recognisable payment difficulties.

What journal entries are there in accounts receivable accounting?

The most important concern the outgoing invoice, incoming payment and valuation allowance. Entries are made on the customer's personal account (debtor), whose balance flows automatically into the control account receivables. The invoice of EUR 59,500 from the worked example is booked as debtor 59,500 to revenue 50,000 and VAT 9,500. If a customer pays, the entry is bank to debtor. The threatened default is recorded as write-downs on receivables 40,000 to specific valuation allowance 40,000; VAT remains unchanged until the receivable is uncollectible.

How do buyers treat factoring in the purchase price calculation?

Often like a financing. Sold receivables are missing from working capital, and recourse rights of the factor or retentions can be deducted from the purchase price as debt-like items.

The Roemer Capital view

In a sale process, receivables are among the items over which the purchase price is ultimately also negotiated. Roemer Capital therefore evaluates the ageing structure of the open items over several months early, calculates days sales outstanding per customer group and derives from it a working capital level that the seller can justify. Overdue items are clarified with the company before the buyer raises them as deduction items.

In financing rounds, the same analysis shows whether reported revenue turns into liquidity. Because Roemer Capital assumes a runway of 12 to 18 months at the start of a process, it also calculates how much capital tighter dunning would release.