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Categorizing Accounts Receivables
An aging report is a report that categorizes the balances of a company’s clients based on the length of time their invoices are outstanding – its age. These accounts are usually categorized into 30-day intervals. Thus, allowing the company to assess its clients in greater detail than if they only evaluated them based on their outstanding balances. This is important because it allows a company to take a step back and evaluate which of their clients are risky to do business with. In these cases, the company might contact their client to notify them of their outstanding invoices and further negotiate business terms if the client fails to pay for their invoices. Thus, the aging report is a tool that helps firms weed out bad clients and improve accounts receivable turnover.
Using the example shown in the preview above, you can see that Company C owes debts of 100, which have been outstanding for over 90 days. Alternatively, this means that Company C fails to pay for 16.7% (100/600= 0.1667) of its purchases. Further business with Company C will need to be evaluated.
The aging report can also be used for other purposes. Most companies usually have provisions for how they evaluate bad debts or doubtful accounts. The longer an invoice is outstanding, the higher the chance it will go unpaid. Companies need to represent these unpaid outstanding debts in their financials. This is referred to as a company’s allowance for doubtful accounts. This aging report template can be used to calculate a company’s allowance for doubtful accounts using assumptions for each time interval.
For example, looking at the preview again, we can see that this company has an allowance for doubtful accounts of $64, based on their assumptions for bad debts.
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