# Accounts Receivable Aging

Accounts receivable aging schedule is a table which groups the accounts receivable of a company by their age in certain ranges / time periods of days, weeks, months etc. In other words, an aging schedule of receivables classifies the accounts receivable into groups by the date they became due and sometimes, by the date they were created.

The aging schedule usually shows the totals for these groups, and such a table is generated automatically by common accounting softwares. Details of accounts receivable under each time group may also be accessed if needed.

Typically receivables are categorized into periods which are multiples of payment terms. For example, if a company sells at payment terms of n/20, the typical classification in aging schedule will be 0 to 20 days, 20 to 40 days, 40 to 60 days and so on.

Accounts receivable aging is often used to estimate bad debts expense by classifying accounts receivable into various age groups and then estimating the probability of default for each age group. The assumption is that the likelihood of default is dependent on the length of time .

The classification of accounts receivable in the accounts receivable aging schedule also helps businesses to identify the customers who take longer to pay so that they can restrict sales to those customers to reduce risk of bad debts.

The next step is to calculate the probability of default for each of the above category, which is then multiplied by the sum of the accounts receivable from each category. This returns the amount of accounts receivable which are expected to become irrecoverable in each category. The sum of the estimated bad debts from each category is fixed as the ending balance of allowance for bad debts account. Bad debts expense is calculated as provided in percentage of receivables method of bad debts estimation.

## Example

In the following table, the accounts receivable have been grouped by periods of 20 days. The probability of a customer defaulting have also been given against each age group. These probabilities may be obtained from historical data, suitably adjusted for any circumstances that have changed since then. Estimated bad debt is simply the product of the probability of default and the receivable balance in each age group.

 Age Group Amount Probabilityof Default EstimatedBad Debt 0-20 days \$64,200 2% \$1,284 20-40 days 11,900 4% 476 40-60 days 5,200 7% 364 60-80 days 350 12% 42 \$2,166

The above age groups may alternatively be labeled as “not yet due”, “20 days past due”, “40 days past due”, and “60 days past due”, respectively.