An open invoice is a bill a seller has issued for goods delivered or services performed that the buyer hasn’t fully paid yet. It stays “open” on both companies’ books from the moment the seller sends it until the balance reaches zero, whether that happens through payment, an applied credit, or a formal write-off. For the seller, every open invoice is money the business expects to collect. For the buyer, it’s money the business owes.
When an Invoice Counts as Open
The “open” label attaches the moment a seller issues the invoice and stays until the balance is fully cleared. An invoice sitting inside its payment window, whether Net 15, Net 30, or Net 60, is still open. An invoice on which the buyer has made a partial payment is still open. Only full settlement closes it.
One quick boundary. A pro forma invoice is not an open invoice. A pro forma is an estimate sent before goods ship or services are performed, so no sale has occurred and no receivable or payable exists yet. The invoice becomes open only once the transaction is complete and a final invoice requesting payment goes out.
The Three Stages of an Invoice
Every commercial invoice moves through three stages.
The first is creation. Line items, quantities, and pricing get compiled into a draft. At this point the document is internal and has no financial effect on either party’s books.
The second is issuance. Sending the invoice is what turns the draft into an open invoice. Issuance starts the buyer’s payment clock, and under accrual accounting it’s also when the seller records the receivable.
The third is settlement. The invoice moves from open to closed once the outstanding balance is fully eliminated. Usually that means the buyer pays in full, but a formally applied credit memo can also close it. Once closed, the receivable on the seller’s books and the payable on the buyer’s books both zero out.
How an Open Invoice Shows Up on the Books
The accounting treatment depends on which side of the transaction you’re on.
The seller records the open invoice as a current asset under Accounts Receivable. That’s money owed to the business by customers for credit sales, and the total AR balance is the combined value of every outstanding invoice. Under accrual accounting, the seller also records the matching revenue on the income statement at the time of sale, even though the cash hasn’t arrived.
The buyer records the same invoice as a current liability under Accounts Payable. The AP balance aggregates every open invoice the buyer has received but not yet paid.
When the buyer pays, both ledgers update at the same time. The seller credits (reduces) Accounts Receivable and debits Cash. The buyer debits (reduces) Accounts Payable and credits Cash. The double-entry recording on both sides keeps the financial statements balanced and in line with generally accepted accounting principles.
Does an Open Invoice Count as Income Before It’s Paid
That depends entirely on your accounting method. Under the accrual method, you report income in the year you earn it, regardless of when payment shows up. If you deliver goods in December and send the invoice, the revenue counts for the current tax year even if the check doesn’t arrive until February.
Under the cash method, you report income only when you actually receive payment. That same December delivery wouldn’t create taxable income until the cash arrives the following year. For businesses with large receivable balances at year-end, the difference is significant.
Not every business gets to choose. The IRS generally requires corporations and partnerships to use accrual accounting unless they meet a gross receipts test. A business qualifies for the cash method only if its average annual gross receipts over the prior three tax years don’t exceed a threshold that started at $25 million in 2018 and is adjusted annually for inflation.1Office of the Law Revision Counsel. 26 USC 448 – Limitation on Use of Cash Method of Accounting For recent tax years, that inflation-adjusted figure has climbed above $30 million. The IRS publishes the exact number each year in its revenue procedures.2Internal Revenue Service. Publication 538 – Accounting Periods and Methods
The accounting method also decides whether you can deduct an unpaid invoice as a bad debt. Accrual-method businesses have already reported the income from the sale, so they’ve met the threshold requirement for claiming a deduction if the invoice becomes uncollectible. Cash-method businesses generally cannot deduct unpaid invoices as bad debts, because they never reported the income to begin with.3Internal Revenue Service. Topic No. 453 – Bad Debt Deduction
How Businesses Track Open Invoices
The main tool for managing open invoices is the accounts receivable aging report. It sorts every unpaid invoice into buckets based on how long it’s been outstanding: current (not yet due), 1–30 days past due, 31–60 days past due, 61–90 days past due, and over 90 days past due.
The point is prioritization. An invoice five days past due probably just needs a reminder email. One that’s 75 days past due might need a phone call from a manager. One at 120 days may require a collections agency or a decision to write it off. The older the invoice, the less likely it is to be collected, and the aging report makes that risk visible at a glance.
Finance teams also use aging data to estimate future losses through an allowance for doubtful accounts. Look at historical collection rates for each bucket, then apply those percentages to current balances. If experience shows that 2% of invoices in the 31–60 day bucket eventually go unpaid, and you have $200,000 in that bucket, you’d reserve $4,000 against potential losses. That reserve appears on the balance sheet as a reduction to accounts receivable.
Days Sales Outstanding (DSO) is the other metric worth watching. Divide total accounts receivable by total credit sales for a period, then multiply by the number of days in that period. A DSO of 45 means it takes your business an average of 45 days to collect payment after a sale. In many industries, a DSO between 30 and 45 days is considered healthy. A rising DSO signals that invoices are staying open longer, which can squeeze cash flow even when sales are strong.
When an Open Invoice Becomes Uncollectible
At some point, an open invoice shifts from “late” to “never going to be paid.” Recognizing that transition matters for both your financial statements and your tax return.
Businesses generally use one of two methods to handle uncollectible invoices. The allowance method estimates losses in advance and reserves against them; when a specific invoice is finally deemed worthless, it’s written off against the existing reserve rather than hitting the current period’s expenses. The direct write-off method skips the reserve and records the loss only when a specific invoice is confirmed uncollectible. The direct method is simpler but less accurate, because the expense lands in a different period than the original sale. For any business where bad debts are more than trivial, the allowance method is the expected approach under GAAP.
On the tax side, the IRS allows businesses to deduct bad debts, but only if the debt is genuinely worthless. You have to show that you’ve taken reasonable steps to collect and that there’s no realistic expectation of payment. You don’t have to wait until a debt is due or go to court, but you do need evidence that collection efforts have failed.3Internal Revenue Service. Topic No. 453 – Bad Debt Deduction Business bad debts, which include unpaid credit sales, can be deducted in full or in part, and the deduction must be taken in the year the debt becomes worthless.4Office of the Law Revision Counsel. 26 USC 166 – Bad Debts
There’s a legal time limit as well. Every state sets its own statute of limitations for debt collection, running from three to ten years depending on the state and the type of debt. Once that window closes, the debt is time-barred, and federal regulations prohibit debt collectors from suing or threatening to sue to collect it.5eCFR. 12 CFR 1006.26 – Collection of Time-Barred Debts The debt still exists and the buyer still technically owes the money, but your legal enforcement options disappear. For invoices approaching the statute of limitations in your state, the decision to write off or escalate to legal action needs to happen well before the deadline arrives.