What Is Accounts Receivable Aging? (Definition and Examples)

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Aging your accounts receivable means measuring the amount of time between when unpaid invoices were issued and the current date. This information is summarized on the accounts receivable aging report, which is typically broken down in 30-day increments, with totals along the right-hand side and the bottom that show you how much money is due to you from each customer and how much is due in each 30-day period, respectively.

The accounts receivable aging report is the go-to tool for businesses with accounts receivable to manage. A word of caution about this report: It’s only as good as the data it summarizes. Make sure the person who is in charge of creating invoices for your business follows good invoice processes. An incorrectly-entered invoice date or payment terms that are not set up correctly can skew your accounts receivable aging report, causing you to make assumptions that are not accurate and might even harm your relationships with your customers.

Don’t be afraid to rely on your accountant or bookkeeper for help managing your accounts receivable (A/R) or understanding any A/R metrics mentioned here. These professionals understand the importance of accounts receivable management, and they will be happy to help you streamline your processes to ensure you have the best information possible.

Accounts receivable aging is a periodic report that categorizes a company’s accounts receivable according to the length of time an invoice has been outstanding. It is used as a gauge to determine the financial health and reliability of a company’s customers.

Aging Method for estimating Uncollectible Accounts

How does accounts receivable aging work?

An accounts receivable aging report typically organizes invoices into columns based on the length of time theyve been outstanding. The reports have columns for accounts currently due and those past due, usually in 30-day segments. Here are some components of this reporting process:

Reporting

Aged receivable reports are usually presented as tables grouped by receivables based on age. Companies can choose whichever date range matches their sales and credit practices, such as weekly, monthly or quarterly. The titles of the columns are accounts receivable due currently and the accounts receivable due in past periods. The titles of the rows are the names of the customers or companies that owe the sums. In each box, accountants write the amount of money theyre expecting. You can also include a total row at the bottom of the table that tabulates your total accounts receivable values.

Allowances for doubtful accounts

Companies can use accounts receivable aging reports to estimate the allowance, or bad debt reserve, for doubtful accounts. This is the amount of money that a company can assume customers do not plan to pay, as the invoice has been past due for an extensive period of time.

Allowances for doubtful accounts are “contra assets” because they reduce the value of a businesss asset, its accounts receivable. Aging reports show the amount a business has to “write off” or deduct from its books. As this is a predictive methodology, if actual results differ, companies can adjust their reporting accordingly.

While there are different methods, heres how the process works in general:

Accountants who conduct accrual-basis accounting might record allowances for doubtful accounts at the same time as a sale. This helps them predict potential bad debt expenses and improve the accuracy of their financial reports. Having a good idea of future revenue and expenses for a given period of time can help business leaders ensure financial stability and success. This is especially important for companies that often provide goods and services on credit.

What is accounts receivable aging?

Accounts receivable aging is a periodic financial report describing an organizations accounts receivable and how long theyve been outstanding. Accounts receivable are payments a company is waiting to collect from debtors in the short term, and they count as a type of asset. These assets occur when a business allows buyers to purchase goods on credit. If theyre outstanding, it means that the buyer has yet to pay the amount on the invoice. For this reason, the accounts receivable aging report measures the fiscal health of a companys customers.

Companies rely on the income from accounts receivable to stay in operation. If many accounts are outstanding, it could mean a business is slowing or taking a lot of credit risk in its sales practices. Analyzing accounts receivable aging can help a business assess its financial situation and identify and solve potential issues. Its a management tool to evaluate:

Benefits of accounts receivable aging

Accounts receivable aging reporting is a common practice in finance firms or accounting departments. There are many benefits to this process, including:

Accounts receivable aging report examples

Accounts receivable aging reports may appear differently based on a companys size and needs. However, here are two examples to consider:

Example 1

An accountant of Sallys Sandwiches is developing an accounts receivable aging report to estimate the shops financial conditions. They find that while most of the business’ accounts receivable are not past due yet, three of them have been past due for over a month. They then send collection letters to the customers, explaining the situation and requesting payment for the invoices.

Example 2

Sunshine credit company is creating an accounts receivable table to calculate its allowances for doubtful accounts. It estimates that 10% of its accounts receivable are possibly bad debt expenses. The company factors this into its books and works toward a plan of giving certain customers a cash-only sale option.

FAQ

Why is accounts receivable aging important?

Aging of Accounts Receivables = (Average Accounts Receivables * 360 Days)/Credit Sales
  1. Aging of Accounts Receivables = ($ 4, 50,000.00*360 days)/$ 9, 00,000.00.
  2. Aging of Accounts Receivables = 90 Days.

How old can accounts receivable be?

An AR collections aging report provides important data on customer payment behaviors and the effectiveness of crediting/collection functions. Running an AR collections report regularly (usually weekly or monthly) helps you understand what to expect from customers in terms of payments.

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