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What is an accounts receivable ageing report and how do you use one?

An accounts receivable ageing report lists unpaid customer invoices or a company’s accounts receivable by periodic date ranges. Companies use accounts receivable ageing reports to determine which customers have invoices with outstanding balances. This collection tool makes it easy for business owners to identify late-paying customers and look for trends to analyse how their collection processes are going.

Accounts receivable ageing reports typically contain invoices. However, they sometimes consist of credit memos that customers haven’t used yet. Credit memos, a type of accounts payable, are transactions posted on a customer’s invoice that serve as a payment or reduction. These are also often called ‘Adjustment Notes’.

To help you get started, we’ve created this guide on accounts receivable ageing reports. We’ll go over what this type of report is, why it’s important, how to prepare an A/R ageing report and more. Continue reading to learn about accounts receivable ageing reports in-depth, or jump to a section using the links below.

Why are accounts receivable ageing reports important?

Accounts receivable ageing reports are important because they can help businesses keep track of outstanding payments from customers. As a business owner, the last thing you want is to sell your products or services and never get paid. That’s why you must always stay on top of your finances and keep track of who owes you to maintain your company’s financial health.

Late payments can be problematic for many reasons. One significant issue with late payments is that they can disrupt a company’s cash flow.

An accounts receivable (A/R) ageing report lists unpaid customer invoices by date ranges. With this report, you’re able to look at which customers owe money and how behind they are on payments. There are many benefits of using accounts receivable ageing reports, and they can be the difference between success and failure.

How to create an accounts receivable ageing report

Preparing an accounts receivable ageing report is relatively straightforward. To get started, follow these steps:

  • Step 1: review open invoices
  • Step 2: categorise open invoices according to the ageing schedule
  • Step 3: list the names of customers whose accounts are overdue
  • Step 4: organise customers based on the number of days outstanding and the total amount due

Once your accounts receivable ageing report is generated, you’ll be able to spot which customers are late, how late they are and how much they owe. You can then take action to get your outstanding payments, such as sending a follow-up invoice or reaching out to a collection agency.

However, it’s important to remember that A/R ageing reports aren’t always perfect. Sometimes they can be deceptive, depending on when you produce the report. For example, many business owners invoice customers towards the end of the month. This can make an A/R ageing report misleading because if a customer pays just a few days later, it can show up as overdue on the report.

With QuickBooks, you can generate an accounts receivable ageing report to calculate and improve your accounts receivable turnover ratio. We make it easy to spot trends and identify late-paying customers so you can collect outstanding payments.

What is an ageing schedule?

You’ll find an ageing schedule on an accounts receivable ageing report. An ageing schedule shows the due dates for unpaid invoices. Rather than listing specific dates for when an invoice is due, the ageing schedule uses invoice date ranges. Standard invoice date ranges most commonly found on an ageing schedule include:

  • Current: invoices due immediately
  • 1–30 days: due within 30 days
  • 31–60 days: overdue 31–60 days
  • 61–90 days: overdue 61–90 days
  • 91+ days: overdue 91 or more days

Depending on your preferences, you can adjust the due date ranges on your accounts receivable ageing report. Business owners use the ageing schedule to determine which clients are paying on time and which clients have outstanding invoices. It’s also used for cash flow purposes, as it allows you to see where money has gone missing.

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How to use the accounts receivable ageing report

A/R ageing reports can tell you a lot about your business, such as how effective your collection payment practices are and how well your cash flow operates. You can also use your accounts receivable ageing report for a variety of purposes, such as:

  • Organising your A/R ageing report to gain insights and filter payments by customers to see who owes you the most money. This way, you can pay more attention to collecting the most expensive payments from late customers.
  • Estimating bad debts, the outstanding payments owed to your business that are deemed uncollectable.
  • Creating a payment collection system that provides rewards to customers who make early payments, sends periodic payment reminders and sends invoices via email for easy access.
  • Identifying late-paying customers and taking appropriate next steps. These steps include sending follow-up invoices, filing a legal complaint, summoning a collections agency or writing off the expense.

Estimating bad debts

An accounts receivable ageing report can be used to estimate bad debts, which are payments that are deemed to be uncollectible. Bad debts typically form when credit is extended to customers who are unable to pay the money back. A best practice for businesses is to use an ageing report to make an estimate of bad debts for each period.

For example, let’s say a company allows a:

  • 1% bad debt allowance for the 0–30 day period
  • 5% bad debt allowance for the 31–60 day period
  • 10% bad debt allowance for the 61–90 day period
  • 15% bad debt allowance for the 91+ day period

Now let’s say the company’s accounts receivable ageing report lists:

  • $200,000 in the 0–30 day period
  • $175,000 in the 31–60 day period
  • $100,000 in the 61–90 day period
  • $75,000 in the 91+ day period

Using that information, this company will have an allowance for doubtful accounts of $32,000. This is calculated using the following formula:

($200,000 x 1%) + ($175,000 x 5%) + ($100,000 x 10%) + ($75,000 x 15%)

2,000 + 8,750 + $10,000 + $11,250 = $32,000

Estimating bad debts allows a company to revise its allowance for doubtful accounts. Companies usually use previous ageing reports to determine the historical percentage of invoice dollar amounts for each date period that result in bad debts. Typically, the longer a debt goes uncollected, the higher the chance it remains uncollected. Businesses must keep this in mind as they manage their finances. This way, they can adjust how much debt they can afford to leave uncollected.

Altering credit policies

One of the main uses of an accounts receivable ageing report is to identify customers who are behind on payments. If you go through your ageing report and notice a single client is responsible for most of your late payments, you can proceed with any necessary measures. However, if you see multiple clients are late on payments, it might be an issue with your credit policy. If this is the case, you can compare your credit risk to industry standards to see if you’re taking too much credit risk.

Adjusting collection practices

Accounts receivable ageing reports allow you to analyse how your collection processes are going. If you have a lot of old accounts receivable, especially after 60 or 90 days, your collection processes may be weak. If you notice this trend, you can adjust your collection practices, such as sending invoices straight away or working with a debt collection agency. This way, you can ensure clients pay the total amount due in a timely manner and improve your days sales outstanding average.

Wrapping up

An accounts receivable ageing report is an important document used by businesses in their bookkeeping and accounting processes. This report helps companies identify customers’ outstanding payments. Without this report, maintaining a healthy cash flow can be challenging. It can also make it difficult to spot bad credit risks to your company. Monthly accounts receivable ageing reports allow you to identify regular late-paying customers and stop doing business with them. You’ll also be able to stop sending goods or providing services to clients before late payments become a problem and disrupt your cash flow.

With QuickBooks accounting software, you’ll be able to generate accounts receivable ageing reports. Our software is extremely flexible, allowing you to customise customer settings to send invoices and reminders. This way, you can stay on top of customer payments and take action when needed.

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