What Is An Accounts Receivable Aging Report?

What Is An Accounts Receivable Aging Report?What Is An Accounts Receivable Aging Report?

Account Receivable Aging report is a periodic report that identifies the company’s receivables according to the duration of time the invoices have been unpaid. Account receivable aging is a vital management tool and analytical tool that helps determine corporate customers’ financial health and, therefore, their business’s health.

Suppose the accounts receivable aging indicates that the company’s receivables are being received much more slowly than expected. In that case, this is an alarming indication that the business may be slowing down or that the business is taking higher credit risk in sales practices.

As a management tool, aging accounts receivable can indicate that specific customers have unfavorable credit risks. Therefore, it can help companies make wise decisions about continuing doing business with recurring paying customers.

This article covers:

Why do we use Aging of Accounts Receivable Method?

It is a method used to manage the customer balance by breaking down the company’s debts and receivables according to their due dates. This shows the distribution of customer or supplier invoices by the due date. (yellowtail.tech) It is possible to configure the indicator of the rate of delay according to the number of days: more than 30 days, more than 60 days, or more than 90 days. The aim is to highlight late payments.

What Does the Receivable Aging Report show?

This report presents you in a categorized manner the total amounts owed by all your customers, including the amounts due and the duration of the outstanding amounts. A typical credit aging report lists invoices within 30 days in columns; You can find the following information in the columns here:

The leftmost column has invoices that have just been issued and those that have completed 30 days,

  • Next column, bills for 31‚Äď60 days,
  • Next column, 61‚Äď90 daily bills,
  • The last column shows all the old invoices.

Considering that this report can also be used as a collection tool, the report can also include each customer’s contact information. A credit aging report gives you the following tips on the status of your receivables:

  • If a customer has several invoices at different times, the report shows how much you will receive and when it will be collected.
  • The receivable aging report indicates that legal action should be initiated for doubtful receivables over 90 days. This report can also help you estimate possible bad debts.

How to calculate the aging of accounts receivable?

It must be calculated from the day when the accounts receivable occurs. The formula is the base date (that is, the deadline or current date when you make a statement). First, subtract the number of days from the date when the accounts receivable occurred. The sales amount, the opening balance of accounts receivable, and the ending balance of accounts receivable can be gained from the statement. The overdue amount of this month refers to the last day of the month. The total amount of accounts receivable at the time when the aging exceeds a specific standard of your organization (such as 30 days, 60 days, 90 days, etc.).

Formula

The formula for calculating the average age of accounts receivable is

The average age of accounts receivable = average balance of accounts receivable average monthly credit sales average of accounts receivable. 

The aging is used to reflect the company’s ability to recover credit sales in a certain accounting period. The larger the average age of accounts receivable, the worse its ability to recover credit sales; conversely, it shows that it can effectively recover its business Accounts receivable. The accounts receivable’s aging refers to the time interval from when the sales are realized, and the accounts receivable are generated to the balance sheet date. In short, it is the book of accounts receivable Uncollected time. Aging is the most important information when analyzing accounts receivable. Since accounts receivable are current assets, all accounts receivable with ages above a reasonable number of turnover days will negatively affect company operations. The higher the age, the lower the capital efficiency, the greater the risk of bad debts, and the higher the financial cost.

The average age of accounts receivable

The average age of accounts receivable is used to reflect an enterprise’s ability to recover credit sales in a specific accounting period. The larger the average age of accounts receivable, the lower its ability to recover the credit sales; conversely, it indicates that the company can effectively recover its accounts receivable. The formula for calculating the average age of accounts receivable is:

The average age of accounts receivable = The average balance of accounts receivable

                                                                               Average monthly credit sales

The Formation of Account Receivable Aging Report based on

In the accrual basis accounting method, account receivables are recorded when you invoice your customer, not after cashing in the cash. You probably also use the accrual method of accounting in your business. All amounts in the aging receivable report are prepared based on the sum of these amounts you invoiced to your customers.

Here we should mention a critical situation that should not be overlooked:

  • Each invoice contains payment terms specific to your customers. For example, you may have applied discounts or various early payment benefits to some of your customers because they paid early. The amounts in the report should be prepared by considering these conditions.

Accounts Receivable Age Grouping

Before discussing further, it is necessary to know that there are several types of accounts receivable. Grouping of this type is based on the time of payment of the receivables. The grouping of classifications is as follows:

Current Accounts Receivable Group

Current accounts receivable are receivables that are paid on time according to a predetermined maturity.

Non-current Accounts Receivable

Non-current accounts receivable are receivables whose payments exceed the predetermined maturity date even though the collection is very active.

Bad Debt Group

Bad debts are receivables whose payments are past due.

In addition to classifying the accounts receivable types, it should also be noted that companies must also estimate the probability of uncollectible receivables in each age group. This is possible so that the company can make preparations and strategies:

Accounts Receivable Age Grouping

In general, age groups of accounts receivable are classified as follows.

  • Accounts receivable group between 1 to 30 days old,
  • Accounts receivable group between 31 to 60 days,
  • Accounts receivable group between 61 to 90 days, and
  • Accounts receivable more than 90 days old.

Billing Opportunity Value

After listing the accounts receivable age group and the table, you can estimate the opportunities for collection. This opportunity value is then multiplied by the number of receivables from each age group of accounts receivable. The estimated bad debts from each group are determined as the ending balance of allowance for receivables accounts.

Look at the example:

Account Receivable Age Group Amount Receivable  Uncollectible opportunities  Amount of uncollectible accounts
1-30 days $20,000,000 1% $200,000
30-60 days $80,000,000 2% $1600000
60-90 days         $70,000,000 5% $3500000
More than 90 days $200,000,000 7% $14000000
Total $ 19300000

Why is the Account Receiving Aging Report Important?

The accounts receivable aging report is important for several reasons:

Assessing Payment Delays:

The report provides a snapshot of outstanding customer balances categorized by the number of days since the invoice was issued. This allows businesses to identify customers who have not made timely payments or exceeded their credit terms. The report highlights payment delays and helps businesses address potential cash flow issues and take appropriate actions to ensure timely collections.

Estimating Bad Debt:

The report helps estimate the amount of bad debt or uncollectible receivables that may need to be written off. By analyzing the balances in each aging category, businesses can identify potential delinquencies and assess the likelihood of collecting payment. This information is crucial for calculating the provision for doubtful accounts and accurately reflecting the company’s financial position.

Managing Cash Flow:

Timely collection of accounts receivable is essential for maintaining healthy cash flow. The accounts receivable aging report provides insights into the aging of outstanding balances, allowing businesses to prioritize collection efforts. By focusing on overdue invoices, companies can improve their cash flow position and allocate resources effectively to ensure a steady inflow of funds.

Monitoring Credit Policies:

The report helps evaluate the effectiveness of credit policies and terms offered to customers. By analyzing the distribution of balances across different aging categories, businesses can assess the creditworthiness of their customers and make informed decisions about credit limits, payment terms, and credit extensions. This information can also be used to identify trends, evaluate customer payment behavior, and adjust credit policies if necessary.

Financial Reporting and Analysis:

The accounts receivable aging report is crucial in financial reporting. Accurate financial statements, such as the balance sheet and income statement, rely on essential information that is provided. Businesses can ensure the fair presentation of their financial position and performance by properly estimating the provision for doubtful accounts based on the report’s data.

Overall, the accounts receivable aging report is essential for monitoring and managing the accounts receivable process. It helps businesses stay on top of payment collections, assess credit risk, estimate bad debt, and maintain a healthy cash flow, ultimately contributing to the financial stability and success of the company.

How does the aging schedule work?

The limitation schedule often categorizes accounts as Current Accounts (less than 30 days due), 1‚Äď30 days due, 30-60 days due, 60-90 days due, and over 90 days due. Businesses can use aging timesheets to see which invoices are overdue and which customers they need to send payment reminders to, or send them to groups if they‚Äôre too far from it. The company wants as many of its accounts as possible to be current, because the longer an account is unpaid, the more likely it will be paid out, resulting in a loss.

Here is a perfect example of an aging schedule:
Clients/ customers Total A/R Current less than 30 days The Last 1-30 Days Due 31-60 Days 61-90 Days More Than 90 Days
ABC Corporation $15000 $7500 $2700
XYZ Company $ 9000 $3500 $2500 $1200
Real estate Company $3000 $1800 $800
Total $27000 $9300 $2700 $4300 $2500 $1200

A company may face financial issues if it has plenty of accounts payable. It may need to borrow money to stay stable due to unpaid accounts. This will affect the company’s bottom line as it will be liable to pay interest on the money it borrows. Every day that a payment is late will impact its financial position, and every account is affected by its complications.

The longer the account is due, the more doubtful the payment will be received. Aging schedules help companies to stay on top of accounts receivable in hopes of reducing doubtful accounts.

Maintain Your Accounts Receivable

The Billed’s beautiful and editable invoice Aging Report Template shows how long your invoice will take or how long it will take before receiving payment for a particular transaction. If an aging report invoice shows that you are collecting at a slower than usual rate, then that is a warning sign. This will lead your business to slow down and show that your company is taking more credit risks than sustainable revenue generation.

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