Accounts Receivable AgingDefined with Examples & More

Written By:
Adiste Mae

What Is Accounts Receivable Aging?

When companies wish to measure the financial health of their customers, the Accounts Receivable Aging is always a helpful tool.

Periodically, companies generate a report on Accounts Receivable in a tabular format showing the amount of invoices due categorized according to the length of time that an invoice is outstanding. 

The Accounts Receivable Aging is a financial tool that companies can use in order to determine the effectiveness of their collection function.

When the movement of the collection is slow, this is a sign that the risk of outstanding invoices defaulting is high and management would not want to take this credit risk. 

How Accounts Receivable Aging Works

A typical Accounts Receivable Aging contains outstanding invoices that are grouped into tables of 30 days, i.e 1-30 days, 31-60 days, 61-90 days, more than 90 days.

Based on this information, management will be able to determine which clients are increasingly becoming credit risks, or find out which of them are habitual late payers.  

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts or Bad Debts is a contra asset account used to bring down the amount of Accounts Receivable total to its net realizable value.

Credit sales will always have a risk of default and through the Accounts Receivable Aging, this can be reasonably estimated. 

What the management usually does is assign a percentage against the grouped invoices corresponding to the probability that it might not get paid.

For example, invoices grouped under 1 – 30 days will have a lower risk of default and will be assigned an allowance for doubtful accounts equivalent to 3%, while invoices outstanding for more than 90 days will be assigned 10%. 

The estimates are not random amounts and are based on a company’s historical data, if available.

The sums of the estimates computed against each group will then be the basis of the company’s Allowance for Doubtful Accounts recorded at the end of the year and reflected in the Balance Sheet. 

Aged Receivables Report

The AR Aging Report shows a tabular data of outstanding invoices, grouped by customer and age of the invoices.

The Report shows tables of invoices grouped in 30 days.

The left side of the table shows currently due invoices (1-30 days) while the right most side shows invoices that are more than 90 days due. 

Accounts Receivable Aging Report

Benefits of Accounts Receivable Aging

Improvement in credit and selling practices

The information that the management receives based on the AR Aging report is an indication of whether or not certain credit practices work for some clients or not.

In instances where clients are found to be habitually in default, they can decide not to extend credit and conduct business only on a cash basis. 

Internal and External Reporting

At each month end or year end, a company can send the AR Aging report to their clients in order to collect outstanding payments.

This will also be the basis for the collection letters that they will send out to the customers and can be attached along with the letter.

With the Accounts Receivable Aging Report, the company can use the information internally for reporting and analysis.

At the same time, it can also help customers reconcile their accounts with the company, and spot any discrepancies with the invoices and help them expedite any payments due.