Aging Schedule

What is an Aging Schedule?

Definition: The Aging Schedule is a tabular representation of all the bills and invoices along with their respective ages, i.e. the date on which these become due. Simply, all the bills receivables and bills payable are classified along with their date of maturity, to keep a check on which payment or receivable is behind its due date and by how many days.

An aging schedule is an accounting table that shows a company’s accounts receivables, ordered by their due dates. Often created by accounting software, an aging schedule can help a company see if its customers are paying on time. It’s a breakdown of receivables by the age of the outstanding invoice, along with the customer name and amount due.

Aging Schedule – organization of business Accounts Receivable according to sale period. As a rule, the schedule is made by a company auditor and is a crucial instrument for assessing the worth of the firmfs investment in receivables. Creditors often need to consult the aging schedule before lending money to a company. An aging schedule may be either an inventory of receivables that are categorized under current and delinquent, or it may be a record of receivables contracted in a specific month. The aging schedule helps in identifying those areas of deliquescence where attempts to recover need to be focused. It also helps in understanding the sufficiency of the reserve for Bad Debts since the greater the period of lapse beyond the date of payment, the more the likelihood of no payment. As customers who have defaulted over a long period usually move to fresh suppliers, their demarcation in an ageing schedule serves as a guide for future sales strategy.

What Does Aging Schedule Mean?

What is the definition of aging schedule? Generally, the longer the account balance is overdue, the more likely it will be uncollectable and will lead to a doubtful debt. Therefore, many firms create an aging schedule of accounts receivables to follow the pattern of collecting their account receivables and track the percentage of doubtful debts.

This schedule ranks each customer based on their total balance and outstanding balance and calculates an estimated percentage of uncollected accounts receivable as well as the total of bad debts. By keeping an aging schedule, firms can easily find out which customers are paying their bills in due time and which customers are less reliable, thus adjusting their credit policies. In the long-term, they can calculate the impact of past due accounts receivables on the firm’s cash flows.

An aging schedule is a report that itemizes payables and receivables into different categories based on their creation dates. The report is used to show which items are overdue, either for payment or receipt. The schedule is typically divided into 30-day categories, so that current items are stated in the 0-30 days category, moderately overdue items are in the 31-60 days category, and very overdue items are stated in later categories. The report is a standard feature in all accounting software packages, which may also allow a user to set up different day ranges than the 30-day classifications just noted. The schedule has the following uses:

  • Payables aging. It is used for deciding when to pay accounts payable.
  • Receivables aging. It is used for deciding when to initiate collection activities on overdue accounts receivable, when to write off a receivable as a bad debt, and when to refer a receivable to a collection agency. The aging may also be used to estimate the total amount of bad debt, which is useful for calculating the most appropriate amount to have in the allowance for doubtful accounts. Yet another use is that a company’s credit department can examine it to decide whether a customer should be granted more or less credit.

Both the payable and receivable aging schedules can be used to compile a cash forecast for a business.

Example

Aging schedule
Aging schedule

The ranks are assigned to each bill receivable/payable according to their ages. The aging schedule categorizes the accounts as Current account – under 30 days, and Past dues account – 1-30 days, 31-60 days, 61-90 days and so on. It is ideal to have more current accounts than the past due accounts because the risk of bad debt is higher in the case of the latter.

Through aging schedule, a company can identify the bills that are overdue on its part and to which customer the payment reminder is to be sent if he is way behind the due date. Also, a firm can project its cash flows by evaluating the liabilities that need to be paid at the earliest and can anticipate the income on the basis of the invoices sent to the customers days back.

Thus, aging schedule is an important working capital management tool that helps in projecting the cash flow pattern, both inflows, and outflows, and helps in estimating the doubtful debts.

Accounts Receivable Aging Schedule

The percentage of bad debts is calculated based on the percentages that George allocates to the balances. By allocating 5% on the outstanding balance, 10% in 1 to 30 days past due, 20% in 31 to 60 days past due, 40% in 61 to 90 days past due, and 60% in 90+ days past due, George finds out that the percentage of total debts is almost 11%.

If the firm changes the weights of each category of days past due, the percentage of total debts will increase or decrease, respectively. Therefore, by keeping an aging schedule of accounts receivables, a form can estimate the percentage of doubtful accounts and take the proper measures.

Benefits of Aging Schedules

Aging schedules are often used by managers and analysts to assess a business’s operational and financial performance. They are particularly helpful for working capital management. Aging schedules can help companies predict their cash flow by classifying pending liabilities by the due date from earliest to latest and by classifying anticipated income by the number of days since invoices were sent out.

Cash flow is important to a business because many businesses fail due to negative cash flow. That’s why tracking the cash flow is a crucial element of maintaining a healthy and successful business. Besides their internal uses, aging schedules may also be used by creditors in evaluating whether to lend a company money.

In addition, auditors may use aging schedules in evaluating the value of a firm’s receivables. If the same customers repeatedly show up as past due in an accounts receivable aging schedule, the company may need to re-evaluate whether to continue doing business with them. An accounts receivable aging schedule can also be used to estimate the dollar amount or percentage of receivables that are probably not able to be collected. That can allow a business to be proactive instead of reactive.

By knowing the percentage of receivables that might be uncollectible, the business can look for solutions to their cash-flow issue before the problem spirals out of control. For certain industries, such as retail or manufacturing, aging schedules can play a significant part in setting credit standards. If a company notices it has a consistent problem with a large number of delinquent accounts, it may look at raising its standards when it comes to a customer’s credit score.

Summary

Define Aging Schedule: An aging schedule is a chart that lists all of the outstanding receivables on account with customers by their due dates and percentage likely to be collected.

  • Aging schedules are accounting tables companies use to see whether payments are being made or received in a timely fashion.
  • These schedules can be customized to include whatever time frame the company wants to track, but commonly include under 30 days, 1-30 days past due, 30-60 days past due, and more than 90 days past due.
  • Using aging schedules can help companies spot cash flow problems before they become an even bigger issue.
  • Aging schedules can help companies spot problems with their credit policies.

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