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What is Accounts Receivable Aging and How to Create Its Report?

Accounts receivable aging reports are used by businesses to keep track of customers who have unpaid invoices. It is a necessary accounting method for any company that wants to manage its finances effectively. Learning how to use this tool can assist you in predicting profits and creating a budget. This article explains an accounts receivable aging report, its benefits, and how to create one.

 

What is an Accounts Receivable Aging Report?

A receivable aging report, also known as an accounts receivable aging report, summarizes all receivables from customers at any time. In addition, the report categorizes all outstanding receivables from all customers into various aging categories based on the number of days since the invoices were issued.

A company should be concerned if the accounts receivable aging report shows that many performances have been outstanding for a long time. It could be a sign that the company is taking on too much risk by giving credit to customers who aren't likely to pay. But, on the other hand, it could also mean that the company isn't doing a good job of collecting payments.

The accounts receivable aging report will list each client's outstanding balance. The information is then divided into columns such as current, 1-30 days past due, 31-60 days past due, 61-90 days past due, 91-120 days past due, and 120+ days past due.

Aging Report Example

Here is a typical example of an aging report:

Accounts Receivable Aging ($)

Company   Name

Current

1-30 days

31-60 days

61-90 days

Over 90 days

Total

ABC & Co.

2000

4000

1000

-

-

7000

XYZ & Co.

1000

2000

5000

-

-

8000

LMN & Co.

1000

2000

2000

1000

1000

7000

Total

4000

8000

8000

1000

1000

22000

 

In the example above, if we assume that the company's credit policy is 60 days, then customers ABC & Co. and XYZ & Co. appear to be within the company's credit period for all customers. However, LMN & Co. appears to delay its payments to the company.

 

How to Use an Accounts Receivable Aging Report?

Start by looking at the largest balances and determining whether the amounts are within the credit period or have been outstanding for longer. The user can also consider using the Pareto Principle, also called the 80/20 Principle, which states that about 80% of the effects come from 20% of the causes, i.e., 80% of the overdue amounts may be attributed to 20% of the customers.

 

Uses of the Accounts Receivable Aging Report

For Management

Management can use the accounts receivable aging report in a variety of ways, including the following:

  • Recognizing the speed with which customers' receivables are collected.
  • Customers' financial health is something you should be aware of.
  • Allowance for doubtful accounts is calculated using a formula.

The report can also be used by management to adjust customers' credit terms and incentivize them to pay off their outstanding debts by offering cash discounts for early payments.

 

For External Stakeholders

Various external stakeholders can use the accounts receivable aging report. Consider the following scenario:

  • The company's lenders can use the report to evaluate the company's short-term solvency and working capital requirements.
  • Investors can use the report (both equity and preferred) to assess the company's customers' short- and long-term solvency and quality.
  • Even tax authorities have used the receivables aging report to learn more about a company's customers' sales cycle and repayment timeline. They also look to see if the policy for calculating the allowance for doubtful accounts matches the credit policy.

Benefits of Accounts Receivable Aging Reports

An accounts receivable aging report is important because it gives you a detailed look at your customers' financial health and history. It's important to remember that the longer an invoice goes unpaid, the more difficult it is to collect.

The aging report addresses this issue as well as provides other advantages, such as:

  • Take care of over-due invoices as soon as possible before they negatively impact your finances or cash flow.
  • Customers cannot buy products or services until their invoices are paid and accounted for.
  • Identifying customers who may pose a credit risk to your company and, if necessary, working with a collections agency.
  • Creating payment plans that better suit the financial needs of your customers helps ensure you're paid more consistently.
  • Gaining a better understanding of your company's accounts receivable and collections processes.

Maintaining a healthy cash flow and identifying potential bad credit risks to your business can be challenging without an account receivable aging report. Make sure to include client information, collection status, the total amount owed, and each client's financial history when creating the accounts receivable aging report.

 

How to Create an Accounts Receivable Aging Report

A simple spreadsheet is typically used to create aging reports. The following steps will help you to create an aging report.

1.Make a list of all open invoices


Begin by making a list of all outstanding invoices. You don't need to be overly specific with your list, but make sure to include information like:

  • Name of the client
  • Each invoice's total amount
  • Date of invoice

Keep all your customer invoices together, as this will come in handy later. In other words, if you have multiple pending invoices for Company X, you can group them for now, but in the next step, you'll organize them by the due date.

 

2.Create an aging schedule


This may seem self-evident, but not all of your outstanding invoices are necessarily past due. You'll need to review each client's invoices and organize your accounts receivable aging report according to the aging schedule.

What is the schedule for aging? The due dates for your invoices are displayed on an aging schedule. Rather than specific deadlines, an aging schedule is usually organized around a range of dates. The following date fields might be included in a typical aging schedule:

  • Current (Invoices due immediately or upon receipt)
  • 1-30 days (Invoices due within the next 30 days)
  • 31-60 days (Invoices that are more than 31 days overdue)
  • 61-90 days (Invoices that are more than 61 days overdue)
  • 91+  days (Invoices that are more than 91 days overdue)

Of course, these are suggestions; most businesses will find it easier to work in 30-day increments.

You'll create a series of columns in your accounts receivable aging report, each representing a different range from your aging schedule. First, you'll write each customer's name down on the left side of the page and then fill in the amount they owe in the next step.

 

3.Organize your invoices according to their due dates


After you've finished with the aging schedule, you can begin filling out your accounts receivable aging report. Begin by ensuring that all of your customers are represented on the chart's left side, then go over each invoice and enter the dollar amount in the column that corresponds to their due dates.

If Company X owes you $100 and the invoice was due six weeks ago, you'd enter "$100" in the "31-60" column, indicating that the invoice is now more than 30 days past due.

If each client has multiple invoices, you'll enter the total amount owed in each column. Again, if Company X owes you $100 for two six-week-old invoices, you'll enter "$200" in the "31-60" column. You'll put "$100" in the "31-60" date range and "$100" in the "91+" column if they have one 6-week-old invoice and one 95-day-old invoice.

 

4.Identify which accounts are past due


Your accounts receivable aging report will make sense after you start collecting data. You'll be able to see your invoice timeline and spot overdue accounts more immediately.

Your AR aging report, in particular, will assist you in identifying accounts that have missed their payment date. Remember that your aging schedule allows you to see which invoices are still pending, so you'll want to concentrate on customers who have missed their payment date.

 

5.Calculate the total amount past due


Next, you'll need to figure out how much you owe. To be clear, you should calculate the amount for each client, not the total for your entire business. To do so, add the total dollar amount in each column representing an invoice that is past due.

You'll also add these values to the total if you apply late fees or penalties. You'll need to give your consumers this total and facts from their previous invoices to back up your claim when you call them.

 

6.Organize outstanding invoices according to the amount past due


Write down the customer totals in the last column to the right of your "91+" date range. You can now reorganize your list based on the amount your customers owe you, resulting in a prioritized list. Pursuing clients who owe you higher sums can help you prevent cash flow issues that can cause your firm to stagnate.

 

7.Review your aging report periodically


At least once a month, evaluate your accounts receivable aging report. If customers don't pay their payments, you'll have to change where their outstanding debts sit on your aging plan. You may also need more clients to your report to track your financial activities properly.

 

Conclusion

Hopefully, you're already using accounting software to keep track of your company's receivables and other important information. ZarMoney offers a variety of business reporting tools to help you evaluate your finances and keep track of your cash flows and receivables.

For example, with their accounts receivable software, you can automate the collection process and configure the workflows seamlessly by managing access permissions and data access. With ZarMoney, nothing goes unnoticed as they give you complete visibility of information and a detailed audit trail to help you stay up-to-date.

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