A trade debtor is a customer who has received goods or services and has not yet paid for them. On the balance sheet it is an asset — money the business is owed — and in most small companies it is the largest asset there is after the premises. It is also the least reliable one, because a debtor is only worth what eventually arrives in the bank, and the gap between those two figures is where a surprising number of businesses discover they are less profitable than they believed.
Where it sits and what belongs in it
Trade debtors — trade receivables in IFRS language — sit under current assets, meaning amounts expected to be recovered within twelve months. They are one component of debtors, and the distinction matters when someone reads your accounts:
- Trade debtors — invoiced sales to customers in the ordinary course of business;
- Other debtors — anything owed to the business that is not a customer invoice: deposits, insurance claims, amounts due from employees;
- Prepayments — costs paid in advance of the period they relate to, such as annual insurance or rent;
- Accrued income — work performed and earned but not yet invoiced, which is a genuine asset but not yet a debtor;
- Amounts owed by group undertakings, disclosed separately because a reader will discount them differently from third-party debt.
The mirror image is trade creditors: suppliers the business has not yet paid. Working capital is essentially the distance between the two, plus stock, and it is why a profitable business can run out of money — profit is recognised when the invoice is raised, cash arrives when the customer pays, and the difference has to be funded from somewhere.
When a debtor is recognised
A sale enters the accounts when the revenue is earned, not when the money arrives. For goods, that is broadly when control passes to the customer; for services, as the work is performed. That is the whole basis of accruals accounting, and it is what distinguishes it from the cash basis. Note how that comparison has flipped: the cash basis is no longer a concession for the smallest traders but the default for eligible unincorporated businesses, with accruals accounting applying only where the business elects for it. A sole trader or partnership that wants its debtors to drive taxable profit now has to choose that treatment rather than fall into it.
The consequence is one that owner-managers meet in their first year of trading: a company can report a healthy profit and a corporation tax bill on sales it has not been paid for. The profit is real, the tax is due on it, and the cash is sitting in the customer's account. Nothing in the accounting rules is wrong; the business simply needs to fund the gap.
Making the figure honest
A debtor recorded at full value that will never be collected overstates both the balance sheet and the profit. Two adjustments keep the number honest.
A bad debt is written off when the amount is genuinely irrecoverable — the customer has failed, the claim is time-barred, or pursuing it costs more than it is worth. The write-off reduces profit in the period it is recognised and is deductible for corporation tax where the debt arose in the trade.
A provision — impairment, in accounting language — reduces the carrying value of debts that may not be collected in full without writing them off. Under FRS 102, the default model is an incurred loss approach: assess receivables for objective evidence of impairment at each reporting date, individually for material balances and collectively for the rest. An expected credit loss model, as IFRS 9 requires, can be applied by policy election, but it is not the FRS 102 default. Either way, a general provision calculated as an arbitrary percentage of the ledger is not deductible for tax; only specific, evidenced impairments are. Keep the analysis at invoice level, and the tax computation follows without argument.
There is a VAT dimension too. Output tax on a sale is paid over whether or not the customer pays, but bad debt relief allows it to be reclaimed where the debt is over six months old from the due date and has been written off in the accounts. It is claimed on the VAT return, and it is routinely forgotten on exactly the debts where it is worth most.
Reading the number properly
Two measures tell you whether the ledger is under control. Days sales outstanding — trade debtors divided by sales, times the number of days in the period — converts the balance into a collection period you can compare against your own payment terms and against last year. A business on 30-day terms running at 62 days DSO is financing its customers for a month at its own cost.
The aged debtor report is the operational version: current, 30, 60, 90 and over-90 day columns. The over-90 column is the one that matters, because recovery rates fall sharply with age and because that is where the provision will eventually come from. Reviewing it monthly, with someone accountable for each line, is the difference between a ledger and a wish list — the mechanics of which our guide to credit control procedures covers in full.
Turning debtors into cash early
Where the working capital gap is structural rather than temporary, the ledger itself can be financed. Invoice discounting advances a percentage of the debtor book while the business continues to collect, usually confidentially. Factoring hands collection to the provider as well, which costs more and is visible to customers. Both are more expensive than an overdraft and considerably faster to arrange; both work best as a bridge across a growth phase rather than a permanent fixture, because the cost compounds quietly against the margin.
The cheaper answer is almost always upstream: shorter terms agreed at the outset, deposits on large orders, invoices raised the day the work completes rather than at month end, and a collection process that starts before the due date. Each of those shortens the gap without paying anyone a discount rate for the privilege.
Acumon builds and monitors this through management accounts and cloud accounting, with statutory accounts that present the provisioning defensibly at the year end. If your debtor days have moved and nobody has asked why, that is working capital quietly leaving the business.