The aging of accounts

Aging of accounts is the practice of itemizing certain types of transactions into time buckets, to show how far in the past they were initiated. A time bucket is a period of time, such as 30 days. A common set of time buckets used for aging is:

  1. 0-30 days old (considered current)
  2. 31-60 days old (considered slightly overdue)
  3. 60-90 days old (decidedly stale)
  4. 90+ days old (very old, action required)

These time buckets can be altered in many accounting software packages. For example, a business that requires payment from its customers in less than 10 days may find that an initial time bucket that extends for the period 0-10 days should be used in its aging of accounts receivable; a longer time bucket would incorrectly imply that a larger proportion of receivables are current, when they are actually late in being paid.

The aging of accounts is most commonly applied to accounts receivable and used in a report format, so that someone perusing the report can easily see which accounts receivable are overdue for payment. The report is used as the basis for account collection activity.

The aging of accounts concept is also applied to accounts payable in a similar report format, so the payables staff can determine whether there are any supplier invoices that are overdue for payment.

The aging of accounts concept is not needed for accounts payable if a company has its accounting records posted to accounting software, since the system can automatically schedule supplier invoices for payment, making it less likely that any invoices will be overdue for payment.

It is possible to also create an aging report for inventory to find out which items have not been used recently and may therefore require investigation to see if they can still be used. However, a better option is to match inventory items to the bills of material and the production schedule to see if there are any plans to use the inventory items in the near future.

The "aging of accounts" terminology is inaccurate, since it is actually the aging of transactions listed within an account. Thus, an accounts receivable aging report states the age of individual transactions within the accounts receivable account.

Related Courses

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