Aging Accounts Receivables Meaning

Understanding Aging Accounts Receivables

The method to prepare an accounts receivables aging report is simple. It is a table of rows and columns that 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.

Example

On April 5, 2019, firm XYZ supplied products worth $360,000 to Indigo Whales Inc with a 30-day credit periodCredit PeriodCredit period refers to the duration of time that a seller gives the buyer to pay off the amount of the product that he or she purchased from the seller. It consists of three components - credit analysis, credit/sales terms and collection policy.read more. Payment must be received by May 4, 2019. Assume that the payment from the Indigo whales was not received when the accounts receivable aging report was prepared on May 31, 2019.

As a result, this sum is due within 30 days of the due date as of May 31, 2019. (i.e., within 30 days from May 04, 2019). Therefore, it will appear in the column numbered 0 to 30 days.

Assume that payment will not be received until June 2019.On June 30, 2019, another aging report for Accounts ReceivablesAccounts ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more was prepared. The sum is now overdue for a period of more than 30 days but less than 60 days from the due date. As a result, it will be classified as 30 to 60 days.

Note: Crux of Accounts Receivables Aging Report – How many days due from Due Date?

Aging Accounts Receivables Report

Let’s take an example of an aging accounts receivables report

A company prepared the following report on September 30, 2019.

Based on the above report, the management can decide to provide $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. In the future, it can revise the percentage estimates.

Benefits

  • The recovery process is streamlined & thus, cash flow is manageable in advance.The report may be used to estimate the allowance for bad debtsAllowance For Bad DebtsA bad debt reserve or allowance for doubtful accounts is the amount allocated under the company’s provision made against the accounts receivable recorded in its books of accounts, for which it is more likely that the firm will not be able to collect the money in future.read more.

  • The report is further used by top management to decide on whether to continue business with the customer or not.It helps initiate legal recovery actions for amounts outstanding for more than two 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

  • The aging report may give a misleading decision that the customer’s financial status 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 the reasons.The report does not provide for interest to be recovered for unacceptable delays.The report does not automatically decide for provisions to be made for doubtful debts.

This article is a guide to aging accounts receivables and their definition. Here we discuss components of aging accounts receivables along with an example, advantages, and limitations. You can learn more from the following articles –

  • Accounts Receivable Turnover CalculationIs Accounts Receivable – Debit or Credit?Examples of Accounts ReceivableIs Accounts Receivable an Asset?Plant Assets