How Accounts Receivable Aging Works

Account Receivable aging report gauges the company's customers to determine their financial health; the report can indicate when the customers are not paying on time or warn when the business operations are slowing down, pointing to business risk.

With accounts receivable aging, a business can expose chronic late payers, revealing whether it should continue trading with them past the due date or stop sales. Aged receivable reports contain columns broken down by a typical date range of 30 days. These columns show the total receivables due, besides those that are past the due period.

The main categories of an account receivable aging report will include;

  • Current invoices due immediately
  • Invoices due with the next 30 days
  • Invoices past their due date by between 31 and 60 days
  • Invoices past their due by between 61 and 90 days
  • Invoices past 90 days of their due date

A typical aging report will show each customer's total invoices due. The groupings are categorized based on the age or duration of the pre, or post-due date of an invoice. Prepare an aging report daily or monthly, depending on the needs of the firm.

Through an aging report, outstanding customer invoices are grouped alongside the number of days since they were due and summarised and presented to company management. This is a vital report, especially if the company policy allows products or services to get paid for in the future, as they can track when these invoices are due.

A firms aging report may contain invoices or credit memos not matched against unpaid invoices or not used by their customers. Once the bad debts are estimated using a tabulated report, the bad debts can be computed based on the company policy. In practice, firms use a fixed percentage for each date range in the aged receivable report. Due to decreasing collectability and increasing default risk, invoices that are way past due get a larger percentage. Each outstanding date range provides a sum of invoices that can get estimated as the total uncollectible receivables.

Businesses use accounts receivable aging to determine the allowance for doubtful debts and estimate the value and percentage of bad debt reported in their financial statements. Companies also use accounts receivable aging when making decisions on writing off bad debt.

Example of Accounts Receivable Aging

Company A has a historical experience of one percent bad debts within their 30-day column, 5% on the 31 to 60 day, and 15% on the 61+ day timeline. The aging report for accounts receivable also contains;

  • $500,000 in the 30-day time column
  • $200,000 in the 31 to 60-day column
  • $50,000 in the 61+ day column

This company’s allowance of doubtful accounts should be $22,500, resulting from calculations as;

(500,000 x 1%) + (200,000 x 5%) + (50,000 x 15%) = $22,500

Additionally, company A's credit department can view the outstanding invoice's current payment status because of changing customer credit limits.

Accounts Receivable Aging Reports Vs. The Aging Schedule

Aging reports and aging schedules are typically the same, as they both depict the relationship between bills and invoices that haven't been settled past their due dates. Accounts receivables get broken down into age, or duration categories, indicating balances that have remained outstanding for specific periods.

An aging schedule can list account receivable dues less than a month old, more than 30 days but less than 45 days or older but less than 90 days past their due. Accounts' aging schedule - helps determine the paying power of customers, which goes hand in hand with managing cash flow estimates.

When structuring an operating budget for a business, accounts receivable aging will be a valuable component. An enterprise will fund its operating costs by understanding the existing customer-paying habits, which match their need for a steady revenue stream.

Attention should be observed to a company's flow of revenue to work within the constructed budget. This enables firms to secure payment terms to vendors and other obligations based on the accounts receivable aging reports reality of its business, avoiding becoming strapped for operating capital.