Accounts Receivable Aging

Accounts receivable aging is a periodic report that categorizes a company’s outstanding invoices by how long they’ve been unpaid. It helps businesses assess customer credit risk, prioritize collections, estimate bad‑debt expense, and manage cash flow.

How it works

• Receivables are grouped into time buckets (commonly: Current, 1–30 days, 31–60 days, 61–90 days, 91–180 days, and >180 days).
• The aged receivables report is a table where rows list customers and columns show amounts in each aging bucket. Totals by bucket give a snapshot of overall receivable quality.
• Management reviews the report to identify chronically late payers and to decide on collection actions or changes to credit terms.

Aged receivables report (example layout)

• Columns: Current | 1–30 days | 31–60 days | 61–90 days | 91–180 days | >180 days
• Rows: Customer A, Customer B, …
• Bottom row: Total receivables per bucket

Estimating uncollectible accounts (Allowance for Doubtful Accounts)

• Companies assign a default percentage to each aging bucket based on historical collections and risk.
• Calculation: multiply the total in each bucket by its assigned percentage, then sum the results to estimate the allowance for doubtful accounts.
• Older buckets receive higher percentages because collectibility declines with age. Receivables older than six months are often unlikely to be collected without legal action.
• IRS guidance: accounts may be written off for tax purposes only when the company has effectively given up on collecting the debt.

Benefits

• Identifies credit and collection problems early.
• Prioritizes collection efforts (target largest or longest‑overdue balances).
• Informs credit policy changes (e.g., require advance payment for repeat late payers).
• Provides the basis for bad‑debt expense and allowance entries on financial statements.
• Supports decisions to pursue collection agencies, legal action, or write‑offs.

Practical steps to produce and use an aging report

1. Pull all outstanding invoices and assign each to the appropriate aging bucket by invoice date or days past due.
2. Aggregate balances by customer and by bucket into the aged receivables table.
3. Review totals and flag customers with large or aging balances.
4. Apply percentage defaults to buckets to calculate the allowance for doubtful accounts.
5. Use the report to drive collection outreach, credit term adjustments, or write‑off decisions.

Key takeaways

• Accounts receivable aging organizes unpaid invoices by age to reveal collection risk and cash‑flow issues.
• The aged receivables report is a core tool for collections management and for estimating uncollectible receivables.
• Applying age‑based default rates produces an allowance estimate that improves the accuracy of financial statements and supports operational decisions about customers and credit policies.

References:
– Internal Revenue Service, Tax Guide for Small Business (relevant sections on bad debts)
– Accounting Tools — Accounts Receivable Aging