What is Accounts Receivable Aging & How to Calculate It?
May 23, 2023
Your accounts receivable aging gives you a closer look into how you can regulate cash flow in your business by closely tracking pending customer payments.
As a business owner, it is a must to monitor all the money that enters your venture if you want to spot any gaps in your balance sheet. It becomes especially crucial once you notice a gradual increase in unpaid invoices or overdue payments from your customers.
This is where creating accounts receivable aging reports comes into play.
If you need help understanding and preparing an accounts receivable aging report, this article is just the guide you need!
- Accounts receivable aging is an accounting process that monitors customer invoices and identifies outstanding balances.
- To calculate your company’s accounts receivable, divide your total accounts receivables by your total sales, then multiply the result by 365 days.
- You can also use accounts receivable aging to estimate bad debt from uncollectible invoices.
- Preparing your accounts receivable aging report improves your collection process, evaluates existing payment terms, monitors delinquent accounts, and assesses the amount to be written off in your financial reports.
What is Accounts Receivable Aging?
Accounts receivable aging—otherwise called “schedule of accounts receivable”—is an accounting method that distinguishes inconsistencies and outstanding balances in your company’s unliquidated funds. It also provides data on the duration at which the invoices have become outstanding.
When unpaid customer invoices are left unfulfilled for a prolonged period, it creates a major gap in your financial growth. The number of overdue payments you have to follow up on also reflects whether you are catering to responsible or delinquent customers.
How Does Accounts Receivable Aging Work?
In essence, the accounts receivable aging method is called ‘aging’ because you enumerate invoices according to the number of days in which customers must settle their outstanding balances. At the end of the day, you need to account for any potential lapses in your earnings, which may stem from notoriously unsettled invoices.
The rule of thumb is that cash-based policies will not yield accounts receivable. The creation of accounts receivable is only applicable to credit-based payments and transactions.
Accounts Receivable Aging Report
Also called accounts receivable reconciliation, the accounts receivable report is a periodic record that itemizes your unsettled customer invoices and unutilized credit memos. Aging reports enable businesses to approximate possible bad debts and make the necessary allowances.
Specify the following details when creating your accounts receivable aging report:
- The accounts or customer names whose payments are unfulfilled from the time the invoice was issued
- The specific duration of the overdue invoice
- The amount due for each account
It is also ideal to group each account based on the number of days since the payment has been past due. A typical aging report shows the following categories based on the invoice due date:
- Current. Payment or invoice is due as soon as possible.
- 1–30 days. Invoice is due within 30 days.
- 31–60 days. Payment is due in a month.
- 61–90 days. Invoice is already overdue for two months.
- Over 91 days. Invoice or payment is already past the due date for over two months.
This is how a regular accounts receivable aging report should look:
Over 90 days
How to Calculate Your Aging Report
The formula for calculating your aging report in terms of accounts receivable days is as follows:
- (Total accounts receivable/Total sales)*365 Days
Now, let’s use the values in the table above as an example and say that your company has a total accounts receivable worth $48,200. Then, let’s say you have $200,000 in sales:
- ($48,200/$200,000)*365 = 87.96 Accounts Receivable days.
On average, it takes 87 to 88 days for your business to collect all pending payments from your clients upon delivering the services and goods they ordered.
Assessing Bad Debts with Accounts Receivable Aging
For example, your company typically encounters 2% on bad debts for payments due within 30 days, 7% on unsettled invoices within the 31–60 day period, 10% on payments overdue for two months, and 15% on payments that were left unsettled for two months or more.
Then, let’s say your latest aging report yielded the following values for each date range: $10,000 (1–30 days), $25,000 (31–60 days), $40,000 (61–90 days), and $60,000 (over 90 days).
Multiply each value by the corresponding percentage.
- $10,000 x 2% = $200
- $25,000 x 7% = $1,750
- $40,000 x 10% = $4,000
- $60,000 x 15% = $9,000
Finally, add each subtotal:
- $200 + $1,750 + $4,000 + $9,000 = $14,950
$14,950 is the amount you will debit from the uncollectible invoices.
Importance of Accounts Receivable Aging
Accounts receivable aging provides your business with relevant insight in the following areas:
#1. Improving Collection Process and Credit Policies
At times, the root cause of late payments is not entirely the customer's fault. Your collection process may not be as foolproof or carefully thought out.
You might need to work closely with your collection agency if you want stricter regulations on collecting overdue payments. Alternatively, your credit policies may be outdated in the sense that they do not give your business enough protection from delinquent accounts.
#2. Evaluating Existing Payment Terms
Payment terms serve as an excellent incentive to motivate customers to settle payments on or before the due date.
There are different variations of payment terms. Two of the most popular ones are 2/10 net 30 and net 15 invoices.
Net 15 is ideal for both new customers and frequent late-payers because it gives enough leeway for your business to regulate cash flow. Meanwhile, a 2/10 net 30 payment term means that the payment deadline is 30 days from the date the invoice was issued. However, customers are qualified for a 2% discount if they fulfill their payment obligations within 10 days.
#3. Writing Off Debts
Your accounts receivable aging segregates responsible payers from delinquent customers.
Once an invoice is deemed uncollectible, you can write it off by removing it from your accounts receivable and debiting the allowances incurred from delinquent accounts. Consequently, your records will only contain accounts that are collectible or payments that have already been settled.
#4. Monitoring Delinquent Accounts
Every business will surely encounter its fair share of notorious late-payers. As such, it is important to identify accounts with a history of missed payment deadlines and maintain a watchful eye on them.
Then, plan an elaborate course of action on how you will address consistent incidences of late payments. At the end of the day, you also want to protect your business’s best interests and prevent losing money down the drain.
Accounts Receivable Aging FAQ
#1. How do you calculate accounts receivable aging?
The formula for calculating your accounts receivable aging is: (Total accounts receivable/Total sales)*365 Days. The result gives you an estimate of the number of days it takes for you to collect payments from your customers after delivering your services to them.
#2. What is a good accounts receivable percentage?
Generally speaking, 10-15% is considered a good accounts receivable percentage. However, it is best to consider your specific industry and business setup to determine the most ideal and accurate accounts receivable percentage for your company.
#3. Why is accounts receivable aging important?
Accounts receivable aging effectively estimates bad debt in your business and calculates the amount to be written off in your financial reports. It also pinpoints delinquent accounts to keep a close eye on and ultimately assess your business’s collection process.
#4. What does accounts receivable aging show?
Your accounts receivable aging shows unpaid customer invoices and groups them together according to their age or the number of days in which customers must settle their outstanding payments.
Consistently keeping tabs on your accounts receivable aging has a positive effect on the financial health of your business. When customers purchase your goods and services, they have to fulfill their end of the transaction by paying their dues on time.
As your business continues to gain traction and attract more customers, you need a system that lets you assess the status of all the orders you have fulfilled and invoices you have sent. Doing so protects your business from losing profit and lets you balance your company’s finances accordingly.
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