Reviewed by Aug 27, 2020| Updated on
What is Aging?
Aging is a tool used by accountants and investors to determine and classify any anomalies within receivables of a company's accounts (ARs). Accounts are categorised and checked depending on the amount of time an invoice has been pending, allowing individuals to get a clearer understanding of bad debt and financial health of a business.
Aging can also be referred to as receivable aging accounts, or an aging schedule. AR is the balance owing to a company for goods or services supplied or used but not yet paid by the customers. Identified as a current asset on the balance sheet, it shows us some amount of money consumers owe for credit-driven transactions.
Aging includes the categorisation by date ranges of unpaid customer invoices and credit memos of a business. Schedules may be extended over various periods, but such reports usually list invoices in groups of 30 days, such as 30 days, 31–60 days, and 61–90 days after the due date. The aging report is sorted by the name of the customer, and the number or date of each invoice. Companies rely on this accounting method to assess their credit and collection functions' effectiveness and quantify future bad debts.
Example of an Aging Report
Company A usually has 1 per cent terrible debts on products in the period of 30 days, 5 per cent terrible debts in the period of 31 to 60 days, and 15 per cent terrible debts in the period of 61 + days. The most recent study on aging has $500,000 over 30 days, $200,000 over the 31 to 60-day period and $50,000 over the 61 + day period.
Based on the formula ($500,000 x 1 per cent) + ($200,000 x 5 per cent) + ($50,000 x 15 per cent), the company has an allowance of $22,500 for questionable accounts.