Accounts Receivable Aging

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What is aging client accounts?

The age of customer accounts (tabulated via a report on old customer accounts) is a periodic report that classifies a company’s customer accounts according to the length of time an invoice is past due. It is used as a gauge to determine the financial health of a company’s customers. If the aging of accounts receivable shows that a company’s receivables are collected much slower than normal, it is a harbinger that activity may slow or that the company is taking on greater credit risk in its business practices.

Key points to remember

  • Aging of accounts receivable is the process of distinguishing open customer accounts based on the length of time an invoice is past due.
  • Aging accounts receivable is useful in determining the allowance for doubtful accounts.
  • The old receivables report lists invoices due by length, often in 30-day segments, for quick reference.

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Aging of customer accounts

Functioning of aging customer accounts

Aging accounts receivable, as a management tool, may indicate that some customers are becoming credit risk and may indicate whether the business should continue to do business with customers who are in arrears. The aging of accounts receivable has columns which are generally divided into 30-day date ranges, and indicates the total of the receivables currently due, as well as the receivables in arrears.

Allowance for doubtful accounts

Aging accounts receivable is useful in determining the allowance for doubtful accounts. When estimating the amount of bad debt to report in a business’s financial statements, the debtor aging report is useful for estimating the total amount to be written off. The main useful feature is the aggregation of receivables according to the duration of the invoice delay.

A company applies a fixed percentage of default to each date range. Longer overdue invoices receive a higher percentage due to the increased risk of default and decreased collectability. The sum of revenue from each pending date range provides an estimate of the amount of bad debt.

Statement of old claims

The report or table of old receivables describing the aging of debtors provides details on specific receivables according to their age. Specific receivables are aggregated at the bottom of the table to display the total receivables of a business, based on the number of days past due on the invoice. Typical column headers include 30-day windows and the rows represent each customer’s receivables. Here is an example of a report on the aging of customer accounts.

Benefits of aging customer accounts

The findings from the accounts receivable aging reports can be improved in a number of ways. First, accounts receivable are derivatives of credit extension. If a business is having trouble collecting accounts, as evidenced by the aging accounts receivable report, some customers may be offered an activity in cash only. Therefore, the aging report is useful in defining credit and sales practices.

Businesses will use information from an aging accounts receivable report to create collection letters to send to customers with outstanding balances. The accounts receivable aging reports mailed to customers along with the month-end statement or collection letter provide a detailed account of the outstanding items. Therefore, an aging accounts receivable report can be used by both internal and external people.

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