Accounts Receivable Aging

Accounts Receivable Aging
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Accounts Receivable Aging is the basic and most frequently chosen tool for evaluating collectibility. Accountants use this tool to check the debt of a company, person or customer. Aging allows to estimate of uncollectible accounts within a specified period of time. Analysis of an account allows to provide useful information about a specific company and the duration of doubtful accounts in a given period of time. Aging is the most frequently chosen method used to value receivables accounts. It is an evaluation technique for assessing past estimates of the allowance for doubtful accounts[1]. Epstein L. wrote: "The accounts receivable aging summary is a report detailing all outstanding customer account. It is usually prepared at the end of an accounting period."[2].

Advantages of accounts receivable aging

According to Trueblood R.M. there are several different advantages of accounts receivable aging[3]:

  • Can be performed with different frequencies, for example monthly or annually. In companies such as department stores and retail stores, annual aging accounts receivable is better because these companies have large receivables and individual balances are low.
  • Is one of the easiest and most frequently used ways for management to establish of an allowance for uncollectible accounts.
  • Assists the management in assessing the performance of its credit policy.
  • Provides a measure of the efficiency of credit personnel.
  • Presents a partial history of the carrying amounts of companies as at a given date.
  • Shows exactly how the amount is distributed over specified periods of time. This allows to quickly detect the most doubtful debt accounts.

Monitor the accounts receivable aging

In general, the longer the bills are due from the buyer, the greater the difficulty in recovering the debt. As a result, it is more likely that they will become bad debts. The company must pay particular attention to the progress in recovery of accounts receivable and any changes have taken place as a result of the preparation of the analysis table for analysis. Preparing an aged analysis table to check the actual days of occupancy of days of receivables allows you to know how much more is due for the loan period and to perform timely monitoring, as well as know how much is overdue during the loan period and calculate interest on the outstanding amount. It then estimates how many bad debts will arise if the interest rate is very high, the company should check its credit policies[4].

Other techniques

According to Riley M. apart from aging there are other methods which helps to analyze doubtful accounts[5]:

  1. “Compare bad debt expense to write-offs"
  2. "Compare beginning allowance for doubtful accounts to write-offs"
  3. "Assess the allowance exhaustion rate"

References

Footnotes

  1. Riley M. (2009), p.1,5
  2. Epstein L. (2009), p.281
  3. Trueblood R.M. (1954), p.293
  4. Song Y. (2014), p.969
  5. Riley M. (2009), p.2

Author: Aleksandra Majcher