Accounts Receivable Aging
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]:
- "Compare bad debt expense to write-offs"
- "Compare beginning allowance for doubtful accounts to write-offs"
- "Assess the allowance exhaustion rate"
Examples of Accounts Receivable Aging
- A company's Accounts Receivable Aging report shows that a customer has been invoiced for goods, but the customer has not paid the invoice within the agreed-upon time frame. The Aging report can help the company identify if the customer is behind in their payments and estimate the amount of time they may take to pay the invoice.
- A business may use Accounts Receivable Aging to track their customers’ payments and to identify any overdue payments. The Aging report can help the company determine how long the customer has been delinquent on their payment and the amount owed. This allows the business to determine if they need to take action to collect on the debt.
- A business may use Accounts Receivable Aging to determine which customers are at risk of not paying their bills. By analyzing the Aging report, the company can identify which customers have an increased risk of not paying their bills within the agreed-upon time frame. This allows the company to take proactive steps to collect the debt, such as calling the customer or sending them a reminder letter.
Limitations of Accounts Receivable Aging
A limitation of Accounts Receivable Aging is that it is not a comprehensive approach to evaluating collectibility. There are several other factors that must be taken into account when assessing the collectibility of accounts receivable. These include:
- The age of the accounts receivable, as aging does not always accurately predict how much of the receivables will be collected.
- The credit standing of the customer, as the financial stability of the customer will affect the collectibility of the receivables.
- The payment terms, as some customers may not be able to pay their receivables on time.
- The collection process, as some customers may resist paying their receivables, even when they are in good financial standing.
- Unforeseen events, such as economic downturns, that may affect the collectibility of receivables.
- The general market conditions, as some receivables may become uncollectible due to market conditions.
Overall, Accounts Receivable Aging is an important tool in assessing collectibility, but it is not the only factor that should be taken into account. A comprehensive approach to assessing collectibility will include the evaluation of these other factors as well.
One other approach related to Accounts Receivable Aging is analyzing customer creditworthiness. This involves looking at the customer’s credit score, past payment history, and financial health in order to determine if they are likely to pay their invoices or not. Other approaches include:
- Analyzing customer payment patterns: This involves tracking customer payments to see if they are paying their invoices on time or if there is a pattern of late payments.
- Analyzing current trends: This involves looking at the current economic environment to determine if there are any trends that could impact the company’s ability to collect on its receivables.
- Monitoring collection activities: This involves tracking how well the company’s collection activities are working and how successful they are in recovering receivables.
In summary, Accounts Receivable Aging is the most commonly used tool for evaluating collectibility. Other approaches include analyzing customer creditworthiness, analyzing customer payment patterns, analyzing current trends, and monitoring collection activities. All of these approaches help to assess the likelihood that a customer will pay their invoices on time.
| Accounts Receivable Aging — recommended articles |
| Aging schedule — Aged debt — Average collection period — Beacon Score — Comparative statements — Aging receivables — Doubtful account — Defensive interval ratio — Performance indicators — Economic intelligence |
References
- Ackerman L. (2013), Blackwell's Five-Minute Veterinary Practice Management Consult second edition, Wiley Blackwell
- Epstein L. (2009), Small Business Accounting Wiley Pathways
- Riley M. (2009), Assessing the Allowance for Doubtful Accounts September
- Song Y. (2014), Research on Accounts Receivable Control Problem in Stages Wuhan Institute of Technology, School of Management
- Trueblood R.M. (1954), Statistical Sampling Applies To Aging of Accounts Receivable Tom 97, March, New York
Footnotes
Author: Aleksandra Majcher
