Aging is an accounting term used in billing. It refers to the number of days an invoice is past due. Businesses can use an aging of accounts to track and collect overdue bills.
Aging begins from the due date of the bill. As soon as the outstanding balance becomes overdue, it begins aging. An invoice that was due August 10 and is unpaid by September 10 would have an aging of 30 days.
Aging of Accounts Receivable
Aging is associated with your business’s accounts receivable—a list of every sale made on credit. These accounts state the amount of money your business still has to receive from goods or services given on credit.
You should prepare an aging of accounts receivable report to easily see the age of outstanding invoices. Things the report might list are each company or person that bought goods or services on credit, their total outstanding balance, how much has been paid, how much is currently due, and how far past due any balances are (1-30 days past due, 31-60 days past due, 61-90 days past due, 91-120 days past due, etc.).
The aging of accounts receivable makes it easy to see who owes what. Once you know how much is owed, you can create a doubtful accounts report.
Figuring Out an Allowance of Doubtful Accounts
A doubtful account is an account that you expect will never be paid off. You can use aging to estimate what your allowance for doubtful accounts will be.
To do this, you need to know—based on your past experience— the probability that an account will not be paid off. For example, a business owner knows that their current accounts not yet due have a 2% chance of not being collected. Their accounts 1-30 days past due have a 5% chance, accounts 31-60 days past due a 13% chance, accounts 61-90 days past due a 35% chance, and accounts over 90 days past due a 60% chance. The probability of not collecting is then multiplied by the totals from the aging of accounts receivable report. This will calculate the estimated total amount that will go uncollected.
The example in the above chart estimates the expected amount to go uncollected to be $3,430.40. The business therefore needs $3,430.40 to make up for the money they will not receive from its doubtful accounts.
Amounts that go uncollected become a business bad debt. When it becomes clear that there is no chance to ever collect a debt, it becomes worthless. You should be able to prove that a debt is worthless by showing that you tried to collect it and were unable to do so. You may be able to write off bad debt to receive a tax deduction from the IRS.
Increasing the Chance of Payments
Analyzing the age of accounts receivable can help you increase payments and reduce doubtful accounts. By looking at how overdue a bill is, you can decide which customers to pursue first. You can send a follow-up invoice; sometimes hiring a collection agency is necessary.
If you notice that your customers often have overdue bills, you may want to consider revising your rules for extending credit. Adjusting the amount of time to pay invoices or limiting the amount of credit given are options.
You might also want to consider adopting a policy to add interest to overdue bills. This may prevent customers from being too lax about paying.
Do you need help with your business’s accounting needs? Our online accounting software is easy to use and is made for the non-accountant. Try it for free!