Receivables aging analysis is a useful analysis based on the accounts receivable aging report. But what is an accounts receivable aging report? It is a party-wise list of receivable balances grouped in relevant age brackets providing useful information about the age of receivables. The age of receivable refers to the time for which an accounts receivable balance is outstanding. For trade receivables, when the credit sales revenue is recorded, second effect is the recognition of receivable balance. So, age of a trade receivable is the time that a receivable is outstanding from the time of its initial recognition.
Accounts receivable aging report can be customized by companies according to their customer types and their analysis requirements. Age brackets can be based on number of days, number of weeks, number of months, or number of years etc. depending on the relevant average credit periods of the receivables.
Sample accounts receivable aging report is shown below for better understanding.
Uses of accounts receivable aging
The accounts receivables aging report provides useful information for accounts receivables management. Some of the uses are highlighted below:
- Helps in identification of long outstanding receivables.
- Customers with a habit of paying late can be identified as high credit risk customers. It can be evaluated whether the company should do future business with these customers or not.
- General increase in average age of trade receivables may be an indication that the company is assuming greater credit risk than it probably should. If so, its credit sales policy may needs some revision to avoid suffering from significant credit losses.
- A company can set some checkpoints in the aging report. If the age of a receivable goes beyond that checkpoint, it should start following up the customer for payment of the amount due.
- Accounts receivable aging report helps in determining the allowance for bad debts as explained in our previous chapter “Example – How to calculate the allowance for doubtful debts”.