An accounts receivable aging report lists what customers owe you and how late it is. For a store that sells on account, to contractors, builders and regulars, it tells you who to call this week.
What the report is
It has one row per customer and a column for each age bucket. The usual buckets are 0-30, 31-60, 61-90 and over 90 days. Each unpaid balance sits in the bucket for its age as of the report date, and the row totals add up to what you are owed.
Age can be counted from the invoice date or from the due date. Counted from the due date, the first column is "current" (not yet late), then 1-30 days late, and so on. Pick one and keep it, or last month's report will not compare with this month's.
| Customer | Current | 1-30 | 31-60 | 61-90 | Over 90 | Total |
|---|---|---|---|---|---|---|
| Lakeside Builders | 1,200.00 | 0.00 | 3,400.00 | 0.00 | 0.00 | 4,600.00 |
| Harbor Pool Service | 0.00 | 850.00 | 0.00 | 0.00 | 2,100.00 | 2,950.00 |
| Total | 1,200.00 | 850.00 | 3,400.00 | 0.00 | 2,100.00 | 7,550.00 |
How to read it
Start at the right: the longer a balance sits, the less likely it is to be paid. Then look at the total row: most of it in Current and 1-30 means customers pay close to their terms. If it drifts right month after month, collection is slipping.
Look down the Over 90 column. One customer holding most of that money is a different problem from many customers each a little late.
What to do with each bucket
- Current: nothing. Make sure the statement went out.
- 1-30 days late: send a statement. Many late payers have only missed the statement.
- 31-60: call, and write down what they said and when they will pay. Ask whether the invoice is in dispute.
- 61-90: hold new orders on account until the balance is paid or a plan is agreed. Put the plan in writing.
- Over 90: decide. Collect it, set up a payment plan, send it to collections, or write it off.
Finance charges are an option for late balances, not a requirement. Federal rules for consumer open-end credit require a periodic statement that shows the interest charged in the cycle.1 Contractors are businesses, and state law sets the rules there. In Idaho, for a credit sale, the rate is the one the parties agree to, unless the credit code limits it.2 In any state, put the rate and the day it starts in the account terms the customer signed, before you charge it.
Keep deposits and lender money off it
Deposits. Money a customer paid before you delivered is not income yet. It is a liability: you owe them the goods.3 If a customer owes 4,000.00 on a delivered order and has paid a 1,000.00 deposit on another order still to deliver, they owe 4,000.00 on this report, not 3,000.00. Show the deposit beside the balance, not netted into it, so nobody sees a clean account and misses a late invoice.
Financed sales. When a lender finances a hot tub, the customer pays the lender, and the lender pays you. Until it does, you are owed money, but not by the customer and not on the customer's schedule. If it sits in the 61-90 bucket under the customer's name, you will call a customer who owes nothing. Show it apart, under the lender, and chase the lender.
Tie it to the books
The aging total should equal the accounts receivable balance in your general ledger on the same date. That check is part of closing each period: post all billing and cash receipts first, then compare the two.4 If they differ, look at the ledger detail for the account. Usual causes are a payment posted to the ledger and not applied to an invoice, an invoice entered by hand in the ledger, and money from a lender counted in one place and not the other.
Writing off a bad debt
When you have decided a balance will not be paid, write it off. The entry moves it out of accounts receivable into a bad debt expense account, so the aging shrinks and the books agree. Keep the record of what you tried.
For tax, the IRS lets a business deduct a bad debt only if the amount owed was already included in its income, and the debt has become partly or totally worthless.5 Most businesses use the specific charge-off method: deduct each debt in the year it becomes worthless. A partly worthless debt is deductible only up to what you charged off on your books that year; a totally worthless one must be deducted in the year it became worthless.6 The reserve method for bad debts was repealed for tax years after 1986.7 Financial statements prepared under GAAP keep an allowance for expected losses instead, so ask your accountant which your books follow.
A deposit you keep was never a receivable, and a lender's unpaid balance is owed by the lender. Neither is a customer's bad debt.
Days sales outstanding
One number sums up the aging: days sales outstanding (DSO), how many days of sales on account are still unpaid.
DSO = accounts receivable ÷ sales on account for the period × days in the period
An example with made-up numbers: a store owed 7,550.00, as in the table above, that sold 90,000.00 on account in the last 90 days, has a DSO of 7,550 ÷ 90,000 × 90 = 7.6 days. Use sales on account only; cash and card sales at the counter never become receivables. Watch the trend month to month more than the number itself.
Questions
What are the buckets on an aging report?
Usually current, 1-30, 31-60, 61-90 and over 90 days, counted from the invoice date or the due date. No rule sets them; pick one way and keep it.
Does a customer deposit go on the aging report?
No. A deposit is money you hold for goods not yet delivered, a liability. Show it beside the customer's balance, never netted against what they owe.
When should I write off a receivable?
When there is no reasonable expectation it will be paid, after the attempts to collect are on record. For tax, a totally worthless debt is deducted in the year it became worthless.
How do I calculate days sales outstanding?
Divide what customers owe by the sales on account for a period, and multiply by the days in the period.
How Retavon does it
Retavon's receivables aging report lists each customer's balance by days past due, in buckets of current, 1-30, 31-60, 61-90 and over 90 by default, and the store can choose its own bucket days. It shows each customer's credit limit, whether new goods on account are held, and the deposits and credit they hold, apart from what they owe. What others, such as a manufacturer or a lender, are expected to pay toward the balance is shown beside it, with the difference from the Accounts Receivable balance in the books, which is zero when the two agree.
Statements are issued for a period, one customer or all who owe, and can be emailed. Finance charges are monthly: the store sets a percent and grace days, previews whom a run would charge, and can forgive a charge. Once a bad debt is written off in your accounting system, writing it off in Retavon takes it out of the aging, the statements and the hold on overdue accounts.
Sources
- Consumer Financial Protection Bureau, Regulation Z, 12 CFR 1026.7, periodic statements: consumerfinance.gov/rules-policy/regulations/1026/7
- Idaho Code 28-42-201, finance charge on a loan or credit sale: legislature.idaho.gov
- AccountingTools, what is a customer deposit: accountingtools.com/articles/what-is-a-customer-deposit.html
- Deltek Costpoint help, A/R Aging Report to the G/L: help.deltek.com
- IRS, Topic no. 453, Bad debt deduction: irs.gov/taxtopics/tc453
- IRS, Publication 334, Tax Guide for Small Business, chapter 8, Bad debts: irs.gov/publications/p334
- 26 U.S. Code section 166, Bad debts: law.cornell.edu/uscode/text/26/166