Accounts Receivable Aging: Definition, Calculation, and Benefits

What Is Accounts Receivable Aging?

Accounts receivable aging is a periodic report that categorizes a company's accounts receivable according to the length of time an invoice has been outstanding. It is used as a gauge to determine the financial health and reliability of a company's customers.

If the accounts receivable aging shows a company's receivables are being collected much more slowly than normal, this is a warning sign that business may be slowing down or that the company is taking on greater credit risk in its sales practices.

How Accounts Receivable Aging Works

Accounts receivable aging, as a management tool, can indicate that certain customers are becoming credit risks. It can be used to help determine whether the company should keep doing business with customers who are chronically late payers. 

Accounts receivable aging has columns that are typically broken into date ranges of 30 days each and shows the total receivables that are currently due, as well as those that are past due for each 30-day time period.

Allowance for Doubtful Accounts

Accounts receivable aging is useful in determining the allowance for doubtful accounts. When estimating the amount of bad debt to report on a company’s financial statements, the accounts receivable aging report is used to estimate the total amount to be written off.

The primary useful feature is the aggregation of receivables based on the length of time the invoice has been past due. Accounts that are more than six months old are unlikely to be collected, except through collections or a court judgment.

Companies apply a fixed percentage of default to each date range. Invoices that have been past due for longer periods of time are given a higher percentage due to increasing default risk and decreasing collectibility. The sum of the products from each outstanding date range provides an estimate regarding the total of uncollectible receivables.

Aged Receivables Report

The aged receivables report is a table that provides details of specific receivables based on age. The specific receivables are aggregated at the bottom of the table to display the total receivables of a company, based on the number of days the invoice is past due.

The typical column headers include 30-day windows of time, and the rows represent the receivables of each customer. Here's an example of an accounts receivable aging report.

Benefits of Accounts Receivable Aging

The findings from accounts receivable aging reports may be improved in various ways. First, accounts receivable are derivations of the extension of credit. If a company experiences difficulty collecting accounts, as evidenced by the accounts receivable aging report, problem customers may be required to do business on a cash-only basis. Therefore, the aging report is helpful in laying out credit and selling practices.

Accounts receivable aging reports are also required for writing off bad debts. Tracking delinquent accounts allows the business to estimate the number of accounts that they will not be able to collect. It also helps to identify potential credit risks and cash flow issues.

Companies will use the information on an accounts receivable aging report to create collection letters to send to customers with overdue balances. Accounts receivable aging reports may be mailed to customers along with the month-end statement or a collection letter that provides a detailed account of outstanding items. Therefore, an accounts receivable aging report may be utilized by internal as well as external individuals.

The Bottom Line

Accounts receivable aging is a type of financial report used by businesses. It distinguishes open accounts receivables—or customers with outstanding balances—based on how long an invoice has been unpaid. It usually tabulates invoices owed in 30-day segments.

This report can be used in a variety of ways. Businesses can use accounts receivable aging to decide whether to continue doing business with a certain customer or whether to require them to pay in advance or in cash. It can be used to decide whether to pursue an invoice in court or through a collections agency. If the company cannot collect the amount owed, the accounts receivable aging report is used to write off the debt.