Accounts Receivable Aging: Definition, Calculation, and Benefits
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What Is Accounts Receivable Aging?
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.
If the accounts receivable aging shows a company’s receivables are being collected much more slowly than normal, this is a warning sign that business may be slowing down or that the company is taking greater credit risk in its sales practices.
Key Takeaways
- Accounts receivable aging is the process of distinguishing open accounts receivables based on the length of time an invoice has been outstanding.
- Accounts receivable aging is useful in determining the allowance for doubtful accounts.
- The aged receivables report tabulates those invoices owed by length, often in 30-day segments, for quick reference.
- Accounts receivable aging is used to estimate the value of receivables that the company does not expect to collect.
- This information is used to adjust the company’s financial statements to avoid overstating its income.
Accounts Receivable Aging
How Accounts Receivable Aging Works
Accounts receivable aging, as a management tool, can indicate that certain customers are becoming credit risks, and may reveal whether the company should keep doing business with customers that are chronically late payers.
Accounts receivable aging has columns that are typically broken into date ranges of 30 days each and shows the total receivables that are currently due, as well as those that are past due for each 30-day time period.
Allowance for Doubtful Accounts
Accounts receivable aging is useful in determining the allowance for doubtful accounts. When estimating the amount of bad debt to report on a company’s financial statements, the accounts receivable aging report is useful to estimate the total amount to be written off.
The primary useful feature is the aggregation of receivables based on the length of time the invoice has been past due. Accounts that are more than six months old are unlikely to be collected, except through collections or a court judgment.
Companies apply a fixed percentage of default to each date range. Invoices that have been past due for longer periods of time are given a higher percentage due to increasing default risk and decreasing collectibility. The sum of the products from each outstanding date range provides an estimate regarding the total of uncollectible receivables.
The IRS allows companies to write off aged receivables, but only if the company has given up on collecting the debt.
Aged Receivables Report
The aged receivables report is a table that provides details of specific receivables based on age. The specific receivables are aggregated at the bottom of the table to display the total receivables of a company, based on the number of days the invoice is past due.
The typical column headers include 30-day windows of time, and the rows represent the receivables of each customer. Here’s an example of an accounts receivable aging report.
| Accounts Receivable Aging | ||||||
|---|---|---|---|---|---|---|
| Current | 1-30 days | 31-60 days | 61-90 days | Over 90 days | Total | |
| Company ABC | $200 | $400 | $0 | $0 | $0 | $600 |
| XYZ LLC | $0 | $500 | $100 | $0 | $0 | $600 |
| UVW Inc. | $0 | $0 | $1,000 | $5,000 | $2,500 | $8,500 |
| Total | $200 | $900 | $1,100 | $5,000 | $2,500 | $9,700 |
Benefits of Accounts Receivable Aging
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, problem customers may be required to do business on a cash-only basis. Therefore, the aging report is helpful in laying out credit and selling practices.
Accounts receivable aging reports are also required for writing off bad debts. Tracking delinquent accounts allows the business to estimate the number of accounts that they will not be able to collect. It also helps to identify potential credit risks and cash flow issues.
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 may be mailed to customers along with the month-end statement or a collection letter that provides a detailed account of outstanding items. Therefore, an accounts receivable aging report may be utilized by internal as well as external individuals.
How Do You Calculate Accounts Receivable Aging?
Accounts receivable aging sorts the list of open accounts in order of their payment status. There are separate buckets for accounts that are current, those that are past due less than 30 days, 60 days, and so on. Based on the percentage of accounts that are more than 180 days old, a company can estimate the expected amount of unpaid accounts receivables for future write-offs.
Why Is Accounts Receivable Aging Important?
There are two main reasons for a company to track accounts receivable aging. The first is to keep track of overdue or delinquent accounts so that the company can continue to pursue old debts. These may be sold to collections, pursued in court, or simply written off. The second reason is so that the company can calculate the number of accounts for which it does not expect to receive payment. Using the allowance method, the company uses these estimates to include expected losses in its financial statement.
What Is the Typical Method for Aging Accounts?
The aging method is used to estimate the number of accounts receivable that cannot be collected. This is usually based on the aged receivables report, which divides past due accounts into 30-day buckets. Each bucket is assigned a percentage, based on the likelihood of payment. By multiplying the total receivables in each bucket by the assigned percentage, the company can estimate the expected amount of uncollectable receivables.
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