Aging Accounts Receivables

Aging Accounts Receivables Meaning

Accounts receivable aging is a periodic report that categorizes a company’s accounts receivable based on the length of time an invoice has been overdue for payment. This report normally comprises of columns with 30-day date ranges and provides the total receivables that are due now as well as those that are due in the future.

Understanding Aging Accounts Receivables

The method to prepare a accounts receivables aging report is simple. It a table of rows and columns that specify the receivables for each customer. Columns are as under:

  • Total Amount Due: Total Receivables from the customer;
  • Not yet due: Out of the total, receivables booked on the day we prepare the report.
  • 1 to 30 days: Out of the total, receivables are due for 30 days from the due date of payment.
  • 31 to 60 days: Out of the total, receivables which due for 60 days from the due date of payment.
  • 61 to 90 days: Out of the total, receivables which due for 90 days from the due date of payment.
  • More than 90 days: Out of the total, receivables which due for more than 90 days from the due date of payment.

Example

On April 5, 2019, firm XYZ supplied products worth $360,000 to Indigo Whales Inc with a 30-day credit periodCredit PeriodCredit period refers to the duration of time that a seller gives the buyer to pay off the amount of the product that he or she purchased from the seller. It consists of three components - credit analysis, credit/sales terms and collection policy.read more. Payment must be received by May 4, 2019. Assume that the payment from the Indigo whales was not received when the accounts receivable aging report is prepared on May 31, 2019.

As a result, this sum is due within 30 days of the due date as of May 31, 2019. (i.e., within 30 days from May 04, 2019). It will appear in the column numbered 0 to 30 days.

Assume that payment would not be received until June 2019. On June 30, 2019, another aging report for Accounts ReceivablesAccounts ReceivablesAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet.read more was prepared. The sum is now overdue for a period of more than 30 days but less than 60 days from the due date. As a result, it will be classified as 30 to 60 days.

Note: Crux of Accounts Receivables Aging Report How many days due from Due Date?

Aging Accounts Receivables Report

Let’s take an example of aging accounts receivables report

You can download this Aging Accounts Receivables Excel Template here – Aging Accounts Receivables Excel Template

A company prepared the following report on September 30, 2019.

Aging Accounts Receivables Example

Based on the above report, the management can decide to make a provision for $114,87,873. The above allowance is based on corporate policy to provide for 1% as a normal allowance, 2.5% for debts outstanding within 30 days, 2.5% for debts outstanding within 60 days but beyond 30 days, 4.5% for debts outstanding within 90 days but beyond 60 days, 5.0% for debts outstanding beyond 90 days. Going forward, it can revise the percentage estimates.

Benefits

  • The recovery process is streamlined & thus, cash flow is manageable in advance.
  • The report may be used to estimate the allowance for bad debts.
  • The report is further used by top management to decide on whether to continue business with the customer or not.
  • It helps in initiating legal recovery actions for amounts outstanding for more than 2 years (i.e., more than 730 days). Some organizations prefer initiating legal actions post 365 days.
  • Interest may be chargeable for amounts overdue for more than 60 or 90 days. Interest calculations are made easy with the help of an aging report.

Limitations

  • The aging report may give a misleading decision that the financial status of the customer is not good. The amount might be outstanding due to any dispute between the parties.
  • The report does not provide reasons for the delay. The collection officer has to call the individual customers to trace reasons.
  • The report does not provide for interest to be recovered for unacceptable delays.
  • The report does not automatically give decision for provisions to be made for doubtful debts.

This article has been a guide to aging accounts receivables and its definition. Here we discuss components of aging accounts receivables along with an example, advantages and limitations. You can learn more from the following articles –