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Written by Cecilia Chee, Singapore   
Monday, 03 October 2011 18:45

 

 

Aging of Accounts Receivable

 

The general ledger account Accounts Receivable usually contains only summary amounts and is referred to as a control account. The details for the control account—each credit sale for every customer—is found in the subsidiary ledger for Accounts Receivable. The total amount of all the details in the subsidiary ledger must be equal to the total amount reported in the control account.


The detailed information in the accounts receivable subsidiary ledger is used to prepare a report known as the aging of accounts receivable. This report directs management's attention to accounts that are slow to pay. It is also useful in determining the balance amount needed in the account Allowance for Doubtful Accounts.


The aging of accounts receivable report is typically generated by sorting unpaid sales invoices in the subsidiary ledger—first by customer and then by the date of the sales invoices. If a company sells merchandise (or provides services) and allows customers to pay 30 days later, this report will indicate how much of its accounts receivable is past due. It also reports how far past due the accounts are.


With the click of a mouse, most accounting software will provide the aging of accounts receivable report. For example, Computer Co.'s software looks at each of its customer's accounts receivable activity and compares the date of each unpaid sales invoice to the date of the report. If we assume the report is dated August 31 and that Gem's credit terms are net 30 days, any unpaid sales invoices with an August date will be classified as current. Any unpaid invoices with a date in July are classified as 1 - 30 days past due. Any unpaid invoices with a date of June are classified as 31 - 60 days past due, and so on. The sorted information is present in a report that looks similar to the following:



Computer Co.
Aging of Accounts Receivable
As of August 31, 2010


Customer Name
Total Receivable
Current
Past Due
1 - 30 Days
Past Due
31 - 60 Days
Past Due
61+ Days
ABC Co. $  62,456 $  59,121 $3,335 $       – $        –
Extreme Co. $  18,210 $          – $      – $       – $18,210
Main Corp. $  48,954 $  48,954 $      – $       – $        –
Trifect LLC $    1,200 $          – $      – $1,200 $        –
Totals $130,820 $108,075 $3,335 $1,200 $18,210


If a customer realizes that one of its suppliers is lax about collecting its account receivable on time, it may take advantage by further postponing payment in order to pay more demanding suppliers on time. This puts the seller at risk since an older, unpaid accounts receivable is more likely to end up as a credit loss. The aging of accounts receivable report helps management monitor and collect the accounts receivable in a more timely manner.




Aging Used in Calculating the Allowance

The aging of accounts receivable can also be used to estimate the credit balance needed in a company's Allowance for Doubtful Accounts. For example, based on past experience, a company might make the assumption that accounts not past due have a 99% probability of being collected in full. Accounts that are 1-30 days past due have a 97% probability of being collected in full, and the accounts 31-60 days past due have a 90% probability. The company estimates that accounts more than 60 days past due have only a 60% chance of being collected. With these probabilities of collection, the probability of not collecting is 1%, 3%, 10%, and 40% respectively.


If we multiply the totals from the aging of accounts receivable report by the probabilities of not collecting, we arrive at the expected amount of uncollectible receivables. This is illustrated below:



Computer Co.
Expected Amount of Accounts Receivable That is Uncollectible
As of August 31, 2010


Age of Accounts Receivables
Accounts Receivable Amount
Probability of Not Collecting
Expected Uncollectible Amount
Current $108,075 1% $1,081
Past Due: 1 - 30 days $    3,335 3% $   100
Past Due: 31 - 60 days $    1,200 10% $   120
Past Due: 61+ days $  18,210 40% $7,284
   Totals $130,820   $8,585


This computation estimates the balance needed for Allowance for Doubtful Accounts at August 31 to be a credit balance of $8,585.

 

 

Last Updated on Monday, 03 October 2011 19:37
 
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