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Accounts Receivable Ageing

Updated on :  

08 min read.

Accounts receivable ageing report is a primary tool used by the company’s collection department to identify overdue invoices. It also helps the management to evaluate its credit and collection functions.

Meaning of accounts receivable ageing

Accounts receivable ageing is a periodic tabular report which categorises its accounts receivables based on the period since the receivable stood outstanding. It helps the organisations to identify long outstanding dues and send follow-ups for the same.

Importance and uses of accounts receivable ageing

The accounts receivable ageing report helps the organisation avoid the cash crunch by identifying potential credit risk parties on time. Nowadays, the accounting software automatically sends payment reminders as per the set time intervals. The ageing report is very important to maintain its financial health and evaluate if it is taking more credit risk as per its business potential.

The management of an organisation uses the accounts receivable ageing for the below purposes:

  1. For efficient collection practices: Accounts receivable ageing helps management understand its collection process’s effectiveness. Long outstanding debts indicate that the company’s collection policy is weak, and regular follow-ups should be sent.
  2. Identify credit risk parties- ageing report helps to identify parties with long outstanding dues. Such outstanding dues may impact the solvency of the organisation. The management can review its billing policy and stop doing business with parties that are regular defaulters. Management can compare its credit policy with the industry standards and update the same to minimise its credit risk.
  3. Protecting the business from cash flow problems- Ageing report helps identify troubled receivable parties and take appropriate action to protect the business from cash crunch.
  4. Creating allowance for bad debts- It helps to estimate potential bad debts. A fixed rate of default can be applied to each date range. Invoices that are long due are applied with a higher percentage due to the increased risk of collectibility. The,n the total default amount of each date range is taken to create an allowance for bad debts.

What is an ageing schedule?

An ageing schedule is a table that draws relationships between outstanding invoices of a business with the respective due dates. It breaks the accounts receivable of the company into age categories. Usually, it breaks the accounts receivable into the following categories:

  • Current- It includes invoices that are due immediately.
  • 0-30 days- It contains invoices that are due within the next 30 days.
  • 31-60 days- It includes invoices that are 31-60 days past their due date.
  • 61-90 days- It has invoices that are 61-90 days past their due date.
  • More than 90 days- It has invoices that are more than 90 days past their due date.
accounts receivable ageing

Accounts receivable ageing report and its uses

Accounts receivable ageing report tells a lot about the company’s business. It tells how good your collection practices are. Some of the uses of an account receivable ageing report are:

  1. By applying adequate filters to the ageing report, one can get a list of customers who owe you the most. You can take regular follow up with such clients and upgrade the collection process.
  2. Evaluate the payment terms of the organisation with industry standards and update the same. Create a collection system that provides rewards to the customers for early payments. 
  3. Deciding on- Whether to continue doing business with regular defaulters? 
  4. It is also useful during various audits carried in the company.

Application of Accounts Receivable ageing Report

An accounts receivable ageing report can be applied to use by the company’s internal as well as external parties:

  1. Internal parties: It is used by the management to evaluate its credit collection process, estimate allowance for bad debts and take various internal control decisions.
  2. External parties: It is reviewed by the auditors while auditing the receivable area. It further helps them evaluate the internal control system in the organisation and form an opinion on the company’s financial statements.

Also, if the company wants to factor in its accounts receivable, an ageing report must be submitted with the factoring agency. Also, the ageing report is useful when you take an overdraft facility from a bank. Banks review the ageing reports for fixing the periodic credit limit.