Aging of Accounts Receivable | Push Digits Chartered Accountants

Aging of Accounts Receivable

Accounts Receivable Aging

It is sorting of receivables that are not yet received by the company from its customers based on time from which the said receivables are due. The report lists customer invoices under the following time buckets:

  • 0 to 30 days
  • 31 to 60 days
  • 61 to 90 days
  • Older than 90 days

Here’s an accounts receivable aging report sample template:

Sr. No# Company Name Current $ 1 to 30 Days $ 31 to 60 Days $ 61 to 90 Days $ Over 90 Days $ Total $
1 ABC Company $200 $450 $0 $0 $0 $650
2 DEF Company $50 $150 $100 $50 $20 $370
3 GHI Company $70 $130 $20 $10 $0 $230
4 JKL Company $150 $300 $0 $0 $0 $450
5 MNO Company $300 $400 $0 $0 $0 $700
Total $770 $1430 $120 $60 $20 $2400

If the aging report is being generated by an accounting software then you can reconfigure the aging report for different periods/ date ranges.

The aging report mainly contains pending invoices but it may also contain credit notes that are yet to be utilized by clients/ customers or that is yet to be matched against a pending invoice.

An entity can use accounts receivable aging report for the following:

1) Allowance for Doubtful debts and Bad debts

An accounts receivables aging helps an entity’s management in determining the allowance for doubtful debts during a specific reporting period. The aging report also helps in determining the amount of receivables to be written off and reported as bad debts on an entity’s financial statements.

Typically, an entity applies a default fixed percentage on each set of receivables that have been aggregated together based on the length of time they were pas due, to determine the allowance for doubtful debts for a specific reporting period.

For example, a company named XYZ allows for 0.5% allowance for doubtful accounts for falling within the 31 to 60 days category while a 1% allowance for accounts that have been classified in 61 to 90 days category. In the current period, the company has receivables of $50,000 in 31 to 60 days period and 100,000 in 61 to 90 days period.

The allowance for doubtful debts of XYZ by using the above-mentioned information would be as follows:

Allowance for doubtful debts = [(50,000 x 0.5%) + (100,000 x 1%) = 1,250

2) Credit Risk

An accounts receivables aging report can also help an entity’s management by identifying and highlighting customers that are becoming a credit risk to the entity. Older receivable balances expose the entity to the threat of cash flow problems, and in a worst-case scenario to bankruptcy as there is a risk that debtors may not be able to settle older invoices. The entity’s management can also compare its risk with the industry standards to determine whether its risk is within the normal allowed limits prevalent in the industry or not.

If the aging report identifies specific customers as late payers then the entity may decide to review its billing policy or stop doing business with the customers identified as late payers.

3) Evaluation of Management in Collection of Receivables

The entity can also use the aging report to evaluate the effectiveness of the management’s performance in collecting receivable amounts from customers. If the report shows older receivable balances then it means that practices adopted by the entity for collecting the receivable amounts from customers are weak and ineffective.

Some customers do not make payment of invoices when they become due and they may wait until they are given regular reminders to settle the outstanding balance. If some clients/ customers take too long to settle outstanding invoices then the entity should review its practices adopted for collecting receivable amounts from customers so that it follows up on outstanding balances as soon as they become due.

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