An accounts receivable aging report is an accounting document that gives the business an overview of its outstanding payments from customers and how long they are past due.
Most businesses have accounts receivable in their accounting ledger.
Accounts receivable refers to sales for which payment has not yet been received, meaning the customer has not paid for the good or service received at the time of the transaction.
Instead, the business has extended credit and expects to receive payment for the transaction at some point in the future. Accounts receivable are typically collected in two months or less.
While in a perfect world all accounts receivable will be collected in the standard amount of time, this is not always the case. Accounts receivable collections is the process a business undergoes to ensure that customers follow through on payments for services or products provided.
The business can and must take different proactive measures to remind and encourage customers to follow through with payment.
These measures help the business ensure that uncollected debts are kept to a minimum.
Before initiating collections, the business must make an evaluation of its accounts receivable. To aide in this evaluation, the business will produce an aging report.
An accounts receivable aging report will provide the business with a snapshot of the status of all its accounts receivable by categorizing them according to how long they are past due.
The aging report is a vital resource for the business that serves some very important functions:
The aging report allows accounting staff to make an evaluation about accounts receivable, to determine which accounts should go to collections, and which collections measures should be applied based on the amount of time they are past due.
The aging report provides vital information to management to evaluate how effective the business is at converting sales to cash. This evaluation reflects on the policies the business follows for extending credit and its procedures for collecting payment once they are past due.
The aging report is also used as a tool for estimating potential bad debts, which are then used to revise what is known as the allowance for doubtful accounts. To remain consistent with the matching principal, businesses will write-off bad debt by setting aside a reserve for expected bad debts or doubtful accounts. This reserve, or allowance, is also referred to as a contra asset account because it “nets” or balances against the accounts receivable assets listed in the balance sheet. The aging report helps the business calculate these estimates by providing a standard amount of time its accounts receivable go uncollected and how many are charged off.
The aging report organizes individual accounts receivable into past due groups. The typical groupings are:
0-30 days
31-60 days
61-90 days
More than 90 days
The status of each group reflects the time that has elapsed since an invoice was issued to the customer. The aging report will help the business organize and evaluate the status of its accounts receivable.
Usually, an aging report will list accounts receivable in lines arranged by customer.
Each customer line will be broken down into columns, with each column representing the total value of invoices that are past due for a certain amount of time.
First column: total of all invoices from the customer that are 30 days old or less
Second column: tally of invoices from the same customer that are more than 30 days but less than 60 days past due
Third column: shows the total value of invoices that are between 61 and 90 days
Final column: values for invoices that are more than 90 days past due
The next line will repeat the same arrangement of past due invoice totals for the next customer.
The accounts receivable aging report supports several important accounting and general business management functions:
The aging report supports collections by categorizing accounts receivable by their time past due so the business can take the appropriate steps to collect.
The aging report can help the business with the evaluation of credit policies. Depending on the number of accounts receivable past due of a certain length of time, the business may need to re-evaluate its credit policies to ensure more reliable payments from customers.
The aging report helps the business maintain healthy cash flow. If too many accounts receivable are going uncollected, the business will not have enough cash flow to sustain healthy operations.
The aging report helps the business calculate estimates for bad debt and doubtful accounts, which supports an accurate monthly close.
Ready to learn more about optimizing your accounts receivable process?
Download our whitepaper The Perfect Match for Accounts Receivable.
Request a demo and we'll show you exactly how our accounts receivable automation software can help you maximize working capital in a unified platform for collecting cash, providing credit, and understanding cash flow.