What are the Aging Accounts Receivables?
Aging the accounts receivables is a process, under which a report is prepared for unpaid customers and the said report is used by the collections officer of the company to track the invoices which are overdue for payments and to take necessary actions for the timely recoverability of revenue of the organization. These are the most important assets of any organization because these are readily convertible into cash.
Components of Aging Accounts Receivables
Aging Accounts receivables applies only to the basis of accrual accounting system. The aging report typically consists of columns with date-ranges of 30 days and presents us with the total receivables which are due currently as well as which are due for a long time. Now, please understand that this report is prepared on a specific date like we prepare the balance sheet. This report may be prepared every weekend or every month-end or every quarter-end or half year-end or year-end. This depends on the requirement of the management.
Now, the report is nothing but a table & the table involves rows & columns. Rows 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 which are booked on the day report is prepared.
- 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.
- We have made sales of $ 360,000 to Indigo Whales Inc on April 05, 2019 with terms of delivery of 30 days. Here, the amount is required to be received by us latest by May 04, 2019. Say, the report is prepared on 31st May 2019. So, as of 31st May 2019, this amount is within 30 days from the due date (i.e. within 30 days from May 04, 2019). It will see, under column 0 to 30 days.
- Say, in the above example, the amount is not received in June 2019 month as well. We prepare an Accounts Receivables aging report on 30th June 2019. So, as on this date, the amount is due for more than 30 days from the due date but less than 60 days from the due date. Hence, it will be seen under the column 30 to 60 days.
Example of Aging Accounts Receivables Report
Let’s take an example of aging accounts receivables report
The following report is prepared on September 30, 2019.
Based on the above report, the management can decide to make provision for $ 114,87,873. The above allowance is based on corporate policy to provide for 1% as 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.
Advantages of Aging Accounts Receivables
The various advantages related to aging accounts receivables are as follows:
- Total receivables are traced to the balance sheet.
- Receivables from each customer can be tracked with total sales.
- This report may be compared with the goods dispatch report. if any revenue booking is missed, it can be booked accordingly.
- The recovery process is stream-lined & thus cashflows can be managed in advance.
- The report may be used to estimate the allowance for bad debts.
- The report is further used by top management of the organization to make a decision about whether to continue business with the customer or not.
- Legal recovery actions can be initiated 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 charged for amounts overdue for more than 60 or 90 days. Interest calculations are made easy with the help of an aging report.
Limitations of Aging Accounts Receivables
The various limitations related to aging accounts receivables are as follows:
- The aging report may give a misleading decision that the financial status of the customer is not good. It could happen that the amount is 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.
Important Points About Aging Accounts Receivables
Some important points related to aging accounts receivables are as follows:
- Make sure that the report is prepared on a specific date. Aging Accounts receivables is a periodic report but prepared on a specific date.
- It may happen that 2 days before the report-date, a customer has remitted the amount with a settlement of 5% discount. Thus, make sure that no actions are taken against those 5% receivables. The discount amount is written off as an expense or against the allowance for bad debts made earlier.
- Interest is to be charged only for those customers, for whom we have specified the same in the agreement. Otherwise, interest is not to be charged.
- Where management has approved that a customer will never pay the balance amount outstanding, make sure it is fully written off.
- Make sure all the customers are listed in the Aging Accounts Receivables report.
The above limitations can be overcome when the report is prepared by computer software.
As we have seen the advantages as well as limitations of the Aging report for Accounts receivables, it is much clear that it is mostly used for decision-making purposes. This report is also used for credit analysis of the customer and companies can decide to revise the credit terms.
Nowadays, the organization outsources the accounts receivable to a company i.e. the management of receivables is given to a third party. This outsourcing process is famously known as Factoring. It saved the organization’s times & money in the administration and collection of accounts receivables. However, Factors charge a nominal fee based on total receivables, against this service.
This 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 –