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What Is Accounts Receivable Aging Report and How to Use It

The accounts receivable aging report shows the unpaid invoice balances along with the duration for which they’ve been outstanding.

The accounts receivable aging report helps businesses identify the invoices that are open and allows them to keep on top of slow paying clients. It’s one of the most important financial documents that an asset-based lender will ask for.

What this article covers:

What Is the Aging of Accounts Receivable Method?

In accounting, aging of accounts receivable refers to the method of sorting the receivables by the due date to estimate the bad debts expense to the business.

Accounts receivables arise when the business provides goods and services on a credit to the clients. For example, you may allow clients to pay goods 30 days after they are delivered. They represent an asset to the business.

To identify the average age of receivables and identify potential losses from clients, businesses regularly prepare the accounts receivable aging report. This allows them to collect these bills as soon as possible to move the money into the bank account.

The accounts receivable aging report will list each client’s outstanding balance. It is then sorted into columns such as: Current, 1-30 days past due, 31-60 days past due, 61-90 days past due, 91-120 days past due, and 120+ days past due.

What Is the Aging Schedule?

The aging schedule is a table that shows the relationship between the unpaid invoices and bills of a business with their respective due dates. It’s called aging schedule because the accounts receivables are broken down into age categories. It indicates the total accounts receivable balance that have been outstanding for specified periods of time.

The aging schedule lists accounts receivable that are less than 30 days old, less than 45 days old or more/less than 90 days old. This is used for determining which of its clients are paying on time and may also be utilized for cash flow estimation.

Example of the accounts aging report

Here’s an example of the accounts aging report:

Source: https://www.freshbooks.com/support/what-is-an-accounts-aging-report

 

In this report, you’ll find a list of every contact with the total amount due at the bottom, organized by the amount of days the amount has been due. Most accounting software packages help you prepare this aging schedule automatically and also allow you to export the list to Excel or PDF.

How Are Aging Schedules Used?

Adjusting Credit Policies

The aging schedule is used to identify clients that are late in paying their invoices. If the bulk of the overdue amount is attributable to a single client, the business can take necessary steps to ensure that the customer’s account is collected promptly.

If there are several customers with overdue amounts that extend beyond 60 days, it may signal the need to tighten the credit policy towards the existing and new clients.

Identifying Cash Flow Problems

The aging schedule also identifies any recent changes and spot problems in accounts receivable. This can provide the necessary answers to protect your business from cash flow problems.

Calculating the Allowance for Doubtful Debts

The accounts receivable aging method is used to estimate the amount of uncollectable debts which includes the approximate amount of the receivables that may not be collected.

This is used as an ending balance of allowance for doubtful accounts.

While the percentage is different for each group and is based on past experience and current economic conditions, the general rule of thumb is that the longer an account receivable remains outstanding, the less are the chances of its collection.

At the end of each accounting period, the adjusting entry should be made in the general journal to record bad debts expense. Compute the total amount of estimated uncollectible and then make the adjusting entry by debiting the bad debts expense account and crediting allowance for doubtful accounts.

Why Is Accounts Receivable Aging Report Important?

Here are some benefits that the accounts receivable aging reports provide:

  • Contact clients at regular intervals so they know you’re on top of your billing and collection process
  • Evaluate payment terms with suppliers and make necessary changes
  • Sever ties with clients who regularly struggle to pay their invoices on time, which in turn can lead to cash flow problems for the business
  • Stop providing goods or services before late payment becomes an issue and you have to write off bad debts
  • If you decide to factor your outstanding invoices as a financing tool, one of the documents your factoring company will require is an accounts receivable aging report. It is used to help determine the factoring rate.

Without an accounts receivable aging report, it can be difficult to maintain a healthy cash flow and identify potentially bad credit risks to your business. While generating the accounts receivable aging report, make sure to include the client information, status of collection, total amount outstanding and the financial history of each client.

The task is easier when you use accounting software that allows you to customize client settings such as sending automatic payment reminders for specific clients, specifying the intervals to send the reminders, and the ability to include a personalized message.

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