What is accounts receivable aging?

An accounts receivable aging is a report that lists unpaid customer invoices and unused credit memos by date ranges. A typical aging report lists invoices in 30-day "buckets," where the left-most column contains all invoices that are 30 days old or less, the next column contains invoices that are 31-60 days old, the next column contains invoices that are 61-90 days old, and the final column contains all older invoices.

The report is sorted by customer name, with all invoices for each customer itemized directly below the customer name, usually sorted by either invoice number or invoice date. A sample report follows, though without the individual invoice detail that is usually found in such a report:

Customer Name	Total A/R	0-30 Days	31-60 Days	61-90 Days	90+ Days
Abercrombie	$15,000	$10,000	$5,000
Bufford Inc.	29,000		20,000	9,000
Chesterton Co.	83,000	47,000	21,000	12,000	3,000
Denver Brothers	8,000				8,000
Totals	$135,000	$57,000	$46,000	$21,000	$11,000

If the report is generated by an accounting software system (which is usually the case), then you can usually reconfigure the report for different date ranges. For example, if your payment terms are net 15 days, then the date range in the left-most column should only be for the first 15 days. This drops 16-day old invoices into the second column, which highlights that they are now overdue for payment.

The report primarily contains invoices, but it may also contain credit memos that have not been used by customers, or which have not yet been matched against an unpaid invoice.

The aging report is the primary tool used by collections personnel to determine which invoices are overdue for payment, and which therefore require them to contact customers. Given its use as a collection tool, the report may be configured to also contain contact information for each customer.

The aging report is also used as a tool for estimating potential bad debts, which are then used to revise the allowance for doubtful accounts. The usual method for doing so is to derive the historical percentage of invoice dollar amounts in each date range that usually become a bad debt, and apply these percentages to the column totals in the most recent aging report.

For example, a company historically experiences 1% bad debts on items in its 30 day time bucket, 5% bad debts in its 31-60 day time bucket, and 15% bad debts in its 61+ day time bucket. Its most recent accounts receivable aging report contains $500,000 in the 30 day time bucket, $200,000 in the 31-60 day time bucket, and $50,000 in the 61+ day time bucket. Based on this information, the company should have an allowance for doubtful accounts of $22,500, which is calculated as:

($500,000 x 1%) + ($200,000 x 5%) + ($50,000 x 15%)

An additional use of the aging report is by the credit department, which can view the current payment status of any outstanding invoices to see if customer credit limits should be changed. This is not an ideal use of the report, since the credit department should also review invoices that have already been paid in the recent past. Nonetheless, the report does give a good indication of the near-term financial situation of customers.

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Allowance for doubtful accounts
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