What is accounts receivable aging (AR aging)?
– A periodic report that groups a company’s unpaid customer invoices by how long they’ve been outstanding. Commonly these groups use 30-day intervals (0–30 days, 31–60 days, etc.). The report helps measure how quickly customers pay and highlights which accounts are becoming credit risks.
How it works (step‑by‑step)
1. Pull all open customer invoices at a given date.
2. Sort each invoice into an age bucket based on days past the invoice date (or days past due).
3. Sum the invoice balances in each bucket to create the aged receivables table.
4. Use historical loss rates by bucket to estimate uncollectible amounts (the “aging method”).
5. Record an allowance for doubtful accounts on the balance sheet and bad‑debt expense on the income statement as needed.
6. Pursue collections or write off individual accounts when collection is deemed hopeless.
Key definitions
– Aged receivables report: a table listing customer receivables broken down by age buckets, with totals by customer and by bucket.
– Allowance for doubtful accounts: a contra‑asset account that reduces accounts receivable to the amount management expects to collect; created using the allowance method rather than direct write‑offs.
– Aging method: estimating bad debts by applying different default percentages to each age bucket (older buckets get higher percentages).
Why AR aging matters
– Cash‑flow monitoring: a growing share of older receivables signals slower cash collection.
– Credit control: identifies chronic late‑payers so policies (credit limits, prepayment, collections) can be adjusted.
– Financial reporting: supports a reasonable estimate of bad‑debt expense and the allowance for doubtful accounts.
– Collection strategy: informs which accounts to send reminders, escalate to collections, or write off.
Typical layout
– Columns: Current (0–30), 31–60, 61–90, 91–180, >180 days (or similar 30‑day buckets).
– Rows: each customer or invoice line, with a bottom row summing totals by column.
Worked numeric example
Assume this aged receivables summary and management’s estimated uncollectible rates:
– 0–30 days: $50,000 — estimated uncollectible 1%
– 31–60 days: $20,000 — estimated uncollectible 5%
– 61–90 days: $10,000 — estimated uncollectible 10%
– 91–180 days: $8,000 — estimated uncollectible 30%
– >180 days: $2,000 — estimated uncollectible 70%
Calculations:
– 0–30: 50,000 × 1% = 500
– 31–60: 20,000 × 5% = 1,000
– 61–90: 10,000 × 10% = 1,000
– 91–180: 8,000 × 30% = 2,400
– >180: 2,000 × 70% = 1,400
Total allowance required = 500 + 1,000 + 1,000 + 2,400 + 1,400 = 6,300
Typical journal entries (illustrative):
– To record estimate of bad debts:
– Dr Bad Debt Expense 6,300
– Cr Allowance for Doubtful Accounts 6,300
– If a specific customer balance of 1,200 is later written off:
– Dr Allowance for Doubtful Accounts 1,200
– Cr Accounts Receivable 1,200
Practical checklist for producing and acting on an AR aging report
– Data prep: ensure invoices, credits, and payments are up to date as of the report date.
– Bucketing: choose consistent bucket boundaries (e.g., 30‑day windows).
– Historical analysis: compute historical collection and default rates by bucket to set realistic percentages.
– Estimate allowance: apply percentages to bucket totals and sum for the allowance.
– Review customers: flag accounts that require reminder letters, phone calls, hold on new credit, or legal action.
– Document decisions: keep notes on collection efforts and criteria used to write off debts (tax authorities require evidence if you claim a write‑off).
– Monitor trends: track bucket mix over time; moving toward older buckets signals increased risk.
Practical notes and assumptions
– Percentages used in the aging method are management estimates, ideally grounded in historical experience and adjusted for current conditions.
– Receivables older than about six months tend to be much harder to collect without collection agencies or legal remedies.
– Tax rules (e.g., IRS guidance) require that a company demonstrate it has abandoned collection efforts before claiming a tax deduction for a bad debt write‑off.
Sources
– Investopedia — Accounts Receivable Aging (Investopedia)
https://www.investopedia.com/terms/a/accounts-receivable-aging.asp
– Internal Revenue Service — Publication 334, Tax Guide for Small Business
https://www.irs.gov/publications/p334
– AccountingTools — Accounts Receivable Aging
https://www.accountingtools.com/articles/accounts-receivable-aging
Educational disclaimer
This explainer is for general educational purposes and does not constitute individualized accounting, tax, or investment advice. For decisions affecting financial statements, taxes, or legal action, consult a qualified accountant, tax professional, or attorney.