Accounts receivable Aging is a method implied by stakeholders of an organisation to identify receivable irregularities. Accountants use it to classify and assess receivables based on the length of time they were outstanding. It is useful to identify customers to whom fund collection reminders need to be sent.
The technique helps management and auditors understand the financial fitness of a company's debtors. If the method shows that receivables are turned into cash slower than standard, it becomes a red flag. It signifies greater credit risk assumed in sales by the organisation.Summary
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Account receivables are created when credit sales occur. Therefore, one way to determine the Aging of an account receivable is by the number of days of sale amount outstanding with the customer. This is also called Daily Sales Outstanding. Thus, formula to computing Age of Accounts Receivable is:
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In the above formula, the number of days in a Financial Year is taken as 360 days to avoid fractions, but it is a discretionary choice.
Suppose, A company has made two credit sales to date. Its debtors are A & B, having a total outstanding sales bill of USD 100,000. The sale to 'A' is USD70,000 and to 'B' is USD30,000. Now to determine the Age of receivable balances with the company using the above Formula would be -
We multiply the average receivable amount, i.e. USD50,000 by 360 days and then divide the resultant by total credit sales of USD100,000. So, the Accounts Receivable Age is 180 days.
Similarly, if instead of the Average Receivable number we take Specifically USD70,000 for A & USD30,000 for B, A's Receivable will be outstanding for 252 days (70,000*360/100,00) and B's Receivable for 108 days (30,000*360/100,000).
An Aged Accounts Receivable report lists unpaid customer invoices by date ranges. It is the primary report used by collection managers know as debtors with balances overdue for payment—the report used by management, to analyse the efficiency of credit policies and collection functions.
It is usually an excel template or a software report. Following details are entered in the Aging Report template or software- client name & address, credit terms, present collection status, and outstanding amount.
The report is generally organised by the debtor's name, listing all invoices in its name. There is further sorting based on invoice number date. It may also show any reversals for each client.
The collections team uses the report to identify potential bad debts. They use this information to revise credit policies and update provisions for probable loss on default.
Mainly Accounts receivables are classified as below for an Aging Report-
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In the aging report, invoices are in 30-day lots, as per the figure above. All extremely old invoices are also reflected, which need to be confirmed and reversed or declared bad.
Organisations' management uses the Accounts Receivable aging technique for the following-
Like any other management technique, it also has a few drawbacks-