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 critical 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 the 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. We can prepare the report every weekend or every month-end or every quarter-end or half year-end or year-end. It 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 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.
- We made sales of $ 360,000 to Indigo Whales Inc on April 05, 2019, with terms of delivery of 30 days. Here, the amount is to be received by us latest by May 04, 2019. Say, the report was prepared on May 31, 2019. So, as of May 31, 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 prepared an Accounts Receivables aging report on June 30, 2019. So, as on this date, the amount is due for more than 30 days but less than 60 days from the due date. Hence, it will be under the column 30 to 60 days.
Example of Aging Accounts Receivables Report
Let’s take an example of aging accounts receivables report
A company prepared the following report 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 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.
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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.
- We can compare this report with the goods dispatch report. If we find any revenue booking missing, we can book it accordingly.
- The recovery process is stream-lined & thus, cashflow 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 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. 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.
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 particular 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 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 –