What Is An Aging Report? Definition, Benefits And Steps
By Indeed Editorial Team
Published 13 October 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Accounts receivable aging report is a list of unpaid customer invoices based on the duration of outstanding invoices. This report allows accounting professionals like collection personnel and managers to identify and filter the customer invoices that get delayed or overdue for payments. Learning about accounts receivable aging can help you pay attention to the due payments and make a defined budget for businesses. In this article, we define this type of report, discuss its benefits, explain how to prepare and use them in accounting and provide a helpful example of this report.
What Is An Accounts Receivable Aging Report?
An accounts receivable aging report is a record that shows the name and due date of the customers with due payments. This report sorts the names of customers on the basis of the duration of due payment since the invoice got raised. Accounts receivable aging can be a great tool to keep track of the actual health of receivables and cash flow of a business. The three main elements of this report are customer's receivables, duration and amount owed.
Late payments from customers may lead to disruption in a company's cash flow. Small businesses or corporations can use accounts receivable aging to evaluate which payments they require to collect first based on their priorities and due dates. By doing this, accounting professionals can keep track of the due payments and improve the financial health of the company.
Benefits Of Accounts Receivable Aging
Depending on the size of the company and the customer base, accounts receivable aging can help you find the reasons for irregularities in the cash flow. This accounting method also helps in identifying potential bad debts and credit risks. Here are other benefits of accounts receivable aging:
Helps in determining the average collection period
Allows companies to revisit credit policies
Helps in tracking the potential issues with the cash flow
Improves collection efforts
Analyses and estimates bad allowances and debts
Helps in understanding the working capital requirements of a company
Helps in improving the customer base
Allows developing payment plans to get paid on a consistent basis
Steps To Prepare This Report
You can prepare this report by listing customer names who owe money, the duration of owing and the total amount of due balance. Here are the steps to help you create accounts receivable aging list:
1. Create the layout
Create the layout of the table using rows and columns. The square boxes are called cells, which can be useful to input data. The vertical line of cells are columns and the horizontal ones are rows. You can use the cells in the first row as headers to input different categories, such as the name of customers, duration of owing money and the amount of owed money.
You can add columns representing 0–30, 31–60, 61–90 and 90+ days, along with the total. The date range represents invoices due within that period and the total shows the final amount that a customer owes for every invoice.
2. Input the invoice amounts
The next step involves filling the table with the right invoice amounts for each customer. You can input the data by clicking on a cell and entering the overdue amount. Make sure you input the accurate invoice to avoid any errors in the calculation. Organise the entries for every customer on the basis of the amount due and its duration.
3. Calculate the total
After inputting the invoice amounts, calculate the invoice total and update that data into the ‘total' column. It can help you find the customer who owes the most money. Once you create the report, you can also identify the customers who are late for submitting the payment and find how much payment is overdue. By identifying the customers with aging and outstanding invoices, you can prioritise and resolve them effectively.
How To Use The Accounts Receivable Aging Method?
An aging list can show details about the customers with delayed payments. You can use this information to improve the cash flow of a company. Here are some helpful and proven ways to use accounts receivable aging report:
1. Understand the period of average collection
Customer payment trends can show the nature of customers towards payments. An aging list may serve as a way to analyse and study customer payment trends. This can be a great tool for understanding the average collection period. This report highlights the number of days a company took to recover the due payments from its customers. When the days to due payment increase, it becomes important for the companies to study this report and take action to recover the due amount.
2. Improve credit policies
When used correctly, accounts receivable aging can be helpful in analysing the effectiveness of credit policies. You can identify reasons for the delay in payment and find specific measures to resolve the issue. If there are multiple customers with delayed payments, there can be a great chance that your credit policies are weak. Accounts receivable aging can help in handling such cases and finding the right measures to improve credit policies.
Bringing a few changes to the payment terms may improve the cash flow to some extent. You can implement new standards of payment such as extending the payment period by 10, 15, 30, 45 or 60 days. This method can allow customers to review their accounts payable and make plans for submitting the due amount before time.
3. Track issues in cash flow
This report can allow you to maintain or improve the health of a company's cash flow. It can be a great tool to track the current issues with the cash flow and implement the necessary measures to remove them. You can address the overdue invoices before they impact the finances or cash flow.
4. Develop strategies to improve collection
Once you identify the problems with the cash flow and collection efforts, you can develop strategies to improve collection efforts. If you have payments due for more than 60 or 90 days, implementing certain strict rules in your collection efforts can be helpful. A weak collection strategy may lead to slower or delayed payment collection.
Many collection professionals help organisations recover their due payments from customers by using the accounts receivable aging method. Some basic practices to improve collection efforts can be sending payment reminders on the first day of delay, communicating in person with the customers and prioritising collection efforts.
5. Analyse and calculate bad debts
Companies can get insights into doubtful accounts and bad debts with the help of these accounts receivable reports. Doubtful accounts are when the payment gets delayed for a long time from an account and it becomes tough to recover. The due amount in such a case is bad debt.
You can estimate allowances for doubtful accounts using the aging method of accounting. This can be a reliable method to estimate bad debts and allowances. Here is a list of such circumstances under which the due amount can be bad debt:
Delay in payment
Change of ownership
Accounts Receivable Aging Example
Some businesses create aging tables for estimating their financial conditions, while some may use them to calculate allowances for doubtful accounts. These reports may vary depending on the size and requirements of a company. Here is an example of what this report looks like:
Client0–30 days31–60 days 61–90 days 90+ days Total Customer A ₹500
₹700Customer B₹1000 ₹500
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