Accounts Receivable Aging
Accounts receivable aging (or aged receivables) is a report or analysis that breaks down a company’s outstanding accounts receivable into different age categories or time intervals. The main purpose of this report is to help businesses identify overdue accounts, monitor the effectiveness of their credit and collection policies, and assess potential bad debts. The report is commonly used in managing cash flow and evaluating the financial health of a company.
An accounts receivable aging report typically categorizes outstanding receivables based on the length of time they have been outstanding, such as:
- 0-30 days (current)
- 31-60 days (past due)
- 61-90 days (significantly past due)
- Over 90 days (seriously past due)
For each category, the report usually lists the customer name, invoice number, invoice date, outstanding balance, and any additional relevant details.
To create an accounts receivable aging report, a company would follow these steps:
- Collect all outstanding accounts receivable data, including customer information, invoice dates, and invoice amounts.
- Calculate the number of days each invoice has been outstanding by subtracting the invoice date from the current date or the report date.
- Categorize each invoice into the appropriate aging category based on the number of days outstanding.
- Calculate the total amount outstanding for each aging category.
The accounts receivable aging report allows a company to identify overdue accounts that may require further follow-up or collections efforts. It also helps in evaluating the effectiveness of the company’s credit and collection policies and making necessary adjustments. Companies can use this information to take appropriate actions, such as payment reminders, collections efforts, or adjustments to credit terms, to improve cash flow and minimize bad debts.
Example of an Accounts Receivable Aging
Let’s consider a fictional company called “Print Pro,” which offers printing services to clients on credit, with payment terms of net 30 days. Print Pro wants to create an accounts receivable aging report to analyze its outstanding receivables.
Here’s a simplified example of an accounts receivable aging report for Print Pro:
| Customer | Invoice # | Invoice Date | Outstanding Amount | Age (Days) | Aging Category |
|---|---|---|---|---|---|
| Client A | 1001 | Jan 1 | $1,000 | 10 | 0-30 days |
| Client B | 1002 | Dec 15 | $2,000 | 27 | 0-30 days |
| Client C | 1003 | Dec 1 | $1,500 | 41 | 31-60 days |
| Client D | 1004 | Nov 20 | $2,500 | 52 | 31-60 days |
| Client E | 1005 | Oct 15 | $3,000 | 88 | 61-90 days |
| Client F | 1006 | Sep 10 | $500 | 123 | Over 90 days |
Based on the aging categories, Print Pro can calculate the total outstanding amount for each category:
- 0-30 days: $1,000 (Client A) + $2,000 (Client B) = $3,000
- 31-60 days: $1,500 (Client C) + $2,500 (Client D) = $4,000
- 61-90 days: $3,000 (Client E) = $3,000
- Over 90 days: $500 (Client F) = $500
Using this report, Print Pro can identify overdue accounts that may require further follow-up or collections efforts, such as Clients C, D, E, and F. The report also helps Print Pro evaluate the effectiveness of its credit and collection policies and make any necessary adjustments to improve cash flow and minimize bad debts.
