What is debt collection?
- By Book Keeping Pros
- Sources checked 16 Oct 2026
Definition
Debt collection is the work of recovering money that a customer or other debtor owes and has not paid by the agreed date. A business can pursue the debt itself, or engage a debt collection service to pursue it. The term usually refers to the more formal steps taken once reminders and informal follow-up have not worked.
Any collection effort depends on being able to show what is owed. The books supply that evidence: the invoice, the payment terms the customer agreed to, any part payments already received, any amount in dispute and a dated history of the reminders sent. A debt that is hard to explain from the records is harder to recover.
Where a collector chases a debt on the business's behalf, the amount usually stays in accounts receivable while collection goes on. If the collector passes on the money after taking its charges, the records need to show both the amount the customer paid and the charges kept, so the customer's account and the cost of collection can each be checked. Your accountant can say how the charges, and any debt that will not be recovered, are recorded.
Debt collection is also different from factoring, in which a business sells its unpaid invoices to a factor company instead of having them chased on its behalf.
In Australia
business.gov.au places a debt collection service late in the process of recovering an unpaid debt: you might decide to engage one after reminders, informal negotiation and a letter of demand have failed to recover it. It suggests telling the customer that you intend to use a debt collector, since that may prompt them to pay first, and points to the ACCC's debt collection guideline for how collectors work.
It notes that contacting other businesses about a debt brings obligations under the law, including consumer law, and directs readers to the ACCC's debt collection information for the detail.
From the other side, its guidance on managing business debt says that once a creditor has handed a debt to a collector, laws apply that must be complied with, and points to information from Moneysmart and the ACCC on dealing with debt collectors.
Common mistakes
- Handing a debt to a collector without the invoice, the agreed terms and a record of every reminder already sent.
- Recording only the net amount a collector passes on, so neither the customer's account nor the collection charges can be checked.
- Treating a sale of invoices to a factor as debt collection, when the arrangement and the records are different.
Related terms
Related service
Accounts payable and receivable
Bills and invoices tracked, with you approving every payment.
Sources
- What to do when you haven't been paid
business.gov.au, Australian Government. Current at 16 October 2026, released 21 January 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Manage being in debt
business.gov.au, Australian Government. Current at 16 October 2026, released 20 February 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.