Tue. Aug 2nd, 2022
    Aging Balance for Accounts Receivable and Payable

    Aging Balance in Accounting

    The aging balance is an accounting document that summarizes a certain amount of information concerning accounts receivable and accounts payable. It is very popular with companies because it allows to have visibility on the state of the future cash flow of the company.

    It is structured around the due date of invoices, which allows to have a quantitative (amount outstanding) but also qualitative (age of invoices versus due dates) view of the accounts receivable.

    Accounting document summarizing a certain amount of information on accounts receivable and accounts payable. The Aged Balance provides visibility into the company’s future cash flow. It takes the form of tables summarizing information on the sums owed by the company’s customers (receivables) or payable to suppliers (debts):

    The customer aging balance shows for each customer:

    the total amount of its receivables (sums to be paid to the company)
    receivables due within 30 days
    receivables due over 60, 90 days

    The aging supplier balance presents for each supplier:
    the total amount to be paid to him
    debts due within 30 days
    debts due over 60, 90 days

    Definitions Accounts Receivable Aging and Accounts Payable Aging

    Accounts Receivable Aging

    An accounts receivable aging is a report that lists unpaid customer invoices and unused credit memos by date ranges. The aging report is the primary tool used by collections personnel to determine which invoices are overdue for payment.

    Accounts Payable Aging

    An accounts payable aging report shows the balances you owe to others. The debts consist of inventory, supplies, and services you buy to operate your business. The aging of accounts payable tracks who your creditors are, how much you owe, and how long you’ve owed debts.

    Read also: Accounting Formulas | Definition, Calculation and Utility

    Audits of accounts payable

    Auditors often focus on the existence of approved invoices, expense reports, and other supporting documentation to support checks that were cut. The presence of a confirmation or statement from the supplier is reasonable proof of the existence of the account. It is not uncommon for some of this documentation to be lost or misfiled by the time the audit rolls around. An auditor may decide to expand the sample size in such situations.

    Auditors typically prepare an aging structure of accounts payable for a better understanding of outstanding debts over certain periods (30, 60, 90 days, etc.). Such structures are helpful in the correct presentation of the balance sheet as of fiscal year end.

    Read also: Financial Ratio | Accounting – Formulas, Examples, Questions, Answers

    Accounts Receivable Age Analysis

    By analyzing the age of accounts receivable, companies can group accounts receivable based on the time of payment of accounts receivable, as follows:
    1. Group of current receivables, namely receivables whose payment is on time according to the due payment date or the specified time limit.
    2. Non-current accounts receivable, namely receivables whose payments are past a predetermined maturity, for example between 7 to 30 days, with very active collection.
    3. Group of bad debts, namely receivables whose payments have exceeded a predetermined time limit, for example, more than 30 days and more after maturity.

    Formulas

    Formula to Calculate Aging of Accounts Receivables

    Aging of Accounts Receivables = (Average Accounts Receivables * 360 Days)/Credit Sales

    Formula to Calculate Aging of Accounts Payables Days

    (Accounts Payable / Cost of Goods Sold) x Number of Days In Year.

    How to prepare aging balance for account receivable and payable

    To prepare accounts receivable aging report, sort the unpaid invoices of a business with the number of days outstanding. This report displays the amount of money owed to you by your customers for good and services purchased.

    To prepare accounts payable aging report, sort the invoices that you owe to others of a business with the number of days outstanding. This report displays the amount that you need to pay to others or to your suplliers.

    Example aging balance
    Accounts Receivable Aging
     Current1-30 days31-60 days61-90 days> 90 daysTotal
    Company ABC$200$400$0$0$0$600
    XYZ LLC$0$500$100$0$0$600
    UVW Inc.$0$0$1,000$5,000$2,500$8,500
      Total $200$900$1,100$5,000$2,500$9,700
    Accounts Payable Aging
     Current1-30 days31-60 days61-90 days> 90 daysTotal
    Company ABC$200$200$200$0$0$600
    Hello LLC$0$500$100$0$0$600
    Buyme Inc.$0$0$1,000$5,000$2,500$8,500
      Total $200$900$1,100$5,000$1,000$8,200

    Examples

    Below are the examples to calculate accounts receivable aging:

    M/s Michel has Accounts receivables for $ 5,00,000.00 on 01/04/2018 and Accounts receivables for $ 4,00,000.00 on 31/03/2019 and it sold the goods $ 9,00,000.00 on credit during the financial year 2008-19.

    Solution:

    Aging of Accounts Receivables is calculated using the formula given below:
    Aging of Accounts Receivables = (Average Accounts Receivables * 360 Days)/Credit Sales

    Aging of Accounts Receivables = ($ 4, 50,000.00*360 days)/$ 9, 00,000.00
    Aging of Accounts Receivables = 90 Days
    In Above Example Accounts receivables are calculated basis Opening Accounts receivables and Closing Accounts receivables divided by two. ($ 5, 00,000.00 + 4, 00,000.00)/2.

    The entity receives payment from accounts receivables average 90 days.

    Accounts Payable Days Example

    For this example Companies A and B are both in the same industry. Company A has $3,500 in accounts payable and has sold $42,000 worth of goods. Company B has 3,000 in accounts payable and has also sold $40,000 worth of goods.

    Company A

    (3,500/42,000) x 365 = 30.4 or 30 days
    Company B

    (3,000/40,000) x 365 = 27.3 or 27 days
    Company A has the a higher number of days payable outstanding. They pay accounts approximately 30 days after billing and Company B pays about 27 days after billing. Company A is able to hold onto its cash longer. This cash can be used for short term investments or to increase working capital. Next, let’s say that Company A is the industry standard. Consequently, Company B might consider extending their payment periods to increase cash-flow ceteris paribus.

    Sources: Accounting Tools, PinterPandai

    Photo credit: Piqsels

    One thought on “Aging Balance for Accounts Receivable and Payable”
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