Accounts receivable aging report: Guide

Accounts receivable aging is a cash management technique used by accountants to evaluate the accounts receivable of a company and identify existing irregularities. Aging makes it easier for companies to recognize probable cases of bad debt, stay on top of outstanding invoices, and keep unpaid bills to a minimum. One of the main uses of an accounts receivable aging report is to identify customers behind on payments.

The journal entry for the Bad Debt Expense increases (debit) the expense’s balance, and the Allowance for Doubtful Accounts increases (credit) the balance in the Allowance. The allowance for doubtful accounts is a contra asset account and is subtracted from Accounts Receivable to determine the Net Realizable Value of the Accounts Receivable account on the balance sheet. In the case of the allowance for doubtful accounts, it is a contra account that is used to reduce the Controlling account, Accounts Receivable. The allowance method is the more widely used method because it satisfies the matching principle.

Aging Method

If the report shows that receivables are being collected slower than usual, it might indicate a greater credit risk in sales or be a sign of the business lagging behind in collections. This approach not only helps in identifying potential bad debts but also plays a significant role in maintaining a healthy cash flow. By providing insights into payment patterns and customer creditworthiness, it aids businesses in making informed decisions about their credit policies and collection processes. Management may also use the aging report to estimate potential bad debts during the reporting period. Management evaluates the percentage of an invoice dollar amount that becomes bad debt per period and then applies the percentage to the current period’s aging reports. One of the ways that management can use accounts receivable aging is to determine the effectiveness of the company’s collections function.

If a company experiences difficulty collecting what it’s owed, for example, it may elect to extend business on a cash-only basis to serial late payers. AR is the balance due to a company for goods or services delivered or used but not yet paid for by customers. Listed on the balance sheet as a current asset, it tells us any amount of money owed by customers for purchases made on credit. For % of sales, you record the calculated amount – you are calculating the bad debt expense. 3) The estimate of bad debt expense – you don’t know exactly how much won’t be collected from customers, but you know you won’t collect it all from past history.

Comparison of Percentage of Net Sales Method and Aging Method

The final point relates to companies with very little exposure to the possibility of bad debts, typically, entities that rarely offer credit to its customers. Assuming that credit is not a significant component of its sales, these sellers can also use the direct write-off method. The companies that qualify for aging method accounting this exemption, however, are typically small and not major participants in the credit market. Thus, virtually all of the remaining bad debt expense material discussed here will be based on an allowance method that uses accrual accounting, the matching principle, and the revenue recognition rules under GAAP.

• An accounts receivable aging schedule can also be used to estimate the dollar amount or percentage of receivables that are probably not able to be collected.
• There is one more point about the use of the contra account, Allowance for Doubtful Accounts.
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• The estimation is typically based on credit sales only, not total sales (which include cash sales).
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Similarly, there is a Total row to sum all outstanding payments corresponding to each interval. Either you take the summarized version, which displays the outstanding payments and the interval they correspond to, or a detailed version which, in addition, contains information about the client and the invoice. The cash flow is affected, but the likelihood of eventually being paid decreases. Current stands for payments that are not due yet, but can be paid for if the customer decides to. Typically, the company will approach the customer through email or other forms a few days before the due date.

Do you own a business?

If you go through your aging report and notice a single client is responsible for most of your late payments, you can proceed with any necessary measures. With this report, you’re able to look at which customers owe money and how behind they are on payments. Effective receivables management is a critical aspect of financial health for businesses. It ensures that companies can convert sales into cash, maintain liquidity, and continue operations without interruption. One tool used in this process is the aging method, an accounting technique that categorizes accounts receivable according to the length of time an invoice has been outstanding. The aging method usually refers to the technique for estimating the amount of a company’s accounts receivable that will not be collected.

If the report shows that some customers are slower payers than others, then the company may decide to review its billing policy or stop doing business with customers who are chronically late payers. Management may also compare its credit risk against industry standards, in order to determine if it is taking too much credit risk or if the risk is within the normal allowed limits in the specific industry. The aging method is used because it helps managers analyze individual accounts. This provides information which can be used to determine whether any further collection efforts are justified or not. The aging method also makes it easier for management to make changes in credit policies and discounts offered to customers.

It groups outstanding invoices based on the duration they’ve been due and unpaid. Company A typically has 1% bad debts on items in the 30-day period, 5% bad debts in the 31 to 60-day period, and 15% bad debts in the 61+ day period. The most recent aging report has $500,000 in the 30-day period, $200,000 in the 31 to 60-day period, and $50,000 in the 61+ day period. The bad debt expense affects only two accounts; the allowance for uncollectible accounts and the bad debt expense account. The current year expense will be the only entry in the bad debt expense account, so use the allowance for uncollectible accounts to solve for it. The company had sales of $35,000,000 for the year, and estimates uncollectible accounts to be approximately 0.25% of sales.