What is an Accounts Receivable Aging Report?

accounts-receivable-aging-report

An account receivable aging report is a record that shows the unpaid balance of the invoice along with its duration. 

This report helps companies to identify open invoices and enables them to keep up with slow-paying customers.

What this article covers:

What is an Accounts Receivable Aging Report?

Accounts receivable aging report is a periodic report that classifies the accounts receivable of a company according to the duration of an invoice outstanding. 

The analysis is used to determine a company’s financial health. Suppose the accounts receivable aging shows that a company collects receivables much slower than usual. In that case, it represents a warning that the company may be slowing down or that in its sales practices, the company is taking more credit risk.

What is the Aging of Accounts Receivable Method?

In terms of accounting, aging accounts receivable means how to sort the receivables by the due date to estimate the company’s bad debt cost.

Accounts receivables arise when a business credits the customer with goods and services. For example, after 30 days of delivery, you may allow the customer to pay for goods. It is an asset to the company.

Companies regularly prepare accounts receivable aging reports to establish an average age of receivables and determine potential clients’ potential losses. They can collect these bills to transfer money to the bank account as early as possible.

The accounts receivable aging report lists the outstanding amount of each client. It is then sorted into columns such as Current, 1-30 days past due, 31-60 days past due, 61-90 days past due, 91-120 days past due, and 120+ days past due.

What is an Aging Schedule?

Generally, the longer the account balance is overdue, the more likely it will be uncollectible and will lead to a doubtful debt. Therefore, many firms create an aging schedule of accounts receivables to collect their account receivables and track the percentage of doubtful debts.

This schedule ranks each customer based on their total balance and outstanding balance and calculates an estimated percentage of uncollected accounts receivable and the total of bad debts. By keeping an aging schedule, firms can easily find out which customers are paying their bills in due time and which customers are less reliable, thus adjusting their credit policies. In the long-term, they can calculate the impact of past due to accounts receivables on the firm’s cash flows.

For example,

John is an accountant at a company that specializes in the sale of sports items. John wants to set up a schedule to analyze the pattern of collection for the firm’s account receivables and calculate the percentage of bad debts. The aging schedule that John creates is as follows:

The percentage of bad debts is calculated based on the percentages that John allocates to the balances. By allocating 5% on the outstanding balance, 10% in 1 to 30 days past due, 20% in 31 to 60 days past due, 40% in 61 to 90 days past due, and 60% in 90+ days past due, John finds out that the percentage of total debts is almost 11%.

If the firm changes the weights of each category of days past due, the percentage of total debts will increase or decrease, respectively. Therefore, by keeping an aging schedule of accounts receivables, a form can estimate the percentage of doubtful accounts and take the proper measures.

How are Aging Schedules Used?

Adjusting Credit Policies

The aging schedule is used to identify clients that are late in paying their invoices. If the bulk of the overdue amount is attributable to a single client, the business can take the necessary steps to ensure that the customer’s account is collected promptly.

If several customers with overdue amounts extend beyond 60 days, it may signal the need to tighten the credit policy towards the existing and new clients.

Identifying Cash Flow Problems

The aging schedule also identifies any recent changes and spots problems in accounts receivable. This can provide the necessary answers to protect your business from cash flow problems.

Calculating The Allowance For Doubtful Debts

The accounts receivable aging method is used to estimate the number of uncollectible debts, which includes the approximate amount of the receivables that may not be collected.

This is used as an ending balance of allowance for doubtful accounts.

While the percentage is different for each group and is based on experience and current economic conditions, the general rule of thumb is that the longer an account receivable remains outstanding, the less are the chances of its collection.

At the end of each accounting period, the adjusting entry should be made in the general journal to record bad debt expenses. Compute the total amount of estimated uncollectible and then adjust the entry by debiting the bad debts expense account and crediting allowance for doubtful accounts.

Benefits of Accounts Receivable Aging Report:

The findings from accounts receivable aging reports may be improved in various ways. First, accounts receivable are derivations of the extension of credit. If a company experiences difficulty collecting accounts, as evidenced by the accounts receivable aging report, specific customers may be extended business on a cash-only basis. Therefore, the aging report helps layout credit and selling practices.

Companies will use the information on an accounts receivable aging report to create collection letters to send to customers with overdue balances. Accounts receivable aging reports mailed to customers along with the month-end statement or collection letter provides a detailed account of outstanding items. Therefore, an accounts receivable aging report may be utilized by internal as well as external individuals.

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