Definition of Aging
In accounting, the term aging is often associated with a company’s accounts receivable. Accounts receivable arise when a company provides goods or services and allows the customer to pay 10 or 30 days later. If some customers do not honor the terms of the sale, the company can experience a temporary or even permanent cash flow problem. In order for the company to minimize these potential problems, a company is wise to routinely review an aging of accounts receivable.
The aging of accounts receivable sorts the company’s accounts receivables by customer and then by time since the sales invoice was issued. Generally, the older the unpaid sales invoice, the greater the likelihood of not collecting the full amount.
Since the aging of accounts receivable is a standard feature of accounting software, it is available with a click of the mouse. The aging is also useful for estimating the amount needed in the related account Allowance for Doubtful Accounts.
Example of an Aging Report
The aging report lists each customer’s name and its unpaid sales invoices that make up the account receivable balance. Then the amounts of each unpaid sales invoice are placed in one of six columns that appear to the right. The headings for those columns are: Current, 1-30 days past due, 31-60 days past due, 61-90 days past due, 91-120 days past due, and 120+ days past due. The aging of accounts receivable gives the company’s management a valuable and easy-to-read report that highlights the customers with past due sales invoices.
An aging can also be prepared for the company’s accounts payable. The aging of accounts payable is based on the dates that the vendors’ invoices are to be paid.
