What it means
A receivables total says how much customers owe. An aging schedule says how much of it is a problem.
A balance of $1 million that is entirely within terms is a healthy asset; the same $1 million with $300,000 more than 90 days old is a collections crisis and probably a write-off in waiting. The schedule makes the distinction visible, both in total and customer by customer, and it is produced by every accounting system at the touch of a button.
Credit controllers work from it daily. Sorting by age and amount identifies which accounts to chase first: the largest and oldest balances, and the customers whose pattern is deteriorating.
Sorting by customer shows who pays promptly and who does not, which informs credit limits and terms. Comparing this month's schedule with last month's shows whether collections are improving or slipping, and a growing over-90-day band is one of the earliest signs of trouble in a business.
The schedule also drives the allowance for doubtful accounts. Each age band is assigned an expected loss percentage based on history: perhaps 1% for current balances, 5% for 1 to 30 days, 15% for 31 to 60, 35% for 61 to 90 and 70% beyond that.
Applying the percentages to the band totals gives the allowance required, and the difference between that and the existing allowance is the period's bad debt expense. Accounting standards' expected credit loss approach is essentially this method, applied systematically and adjusted for current conditions.
Lenders and analysts read the schedule for the same reasons. A bank lending against receivables will exclude balances over 90 days from the borrowing base.
An acquirer's due diligence will test the schedule to see whether the receivables it is paying for are real. And a payables aging schedule, the mirror image, shows whether a company is paying its suppliers on time or stretching them, which is a signal about its own cash position.
In practice
Real-world examples.
Example
A credit controller starts each Monday with the aging schedule sorted by amount within the over-60-day bands and calls every customer on the first page.
Example
A company's auditors compare the year-end aging with the prior year and question why the 61 to 90 day band has tripled while sales are flat.
Example
A supplier reviewing a new customer asks for its payables aging to see whether it pays other suppliers on time.
Think of it
“An aging schedule sorts receivables by age-showing how long customers have owed you money.
Formula
Calculation
Allowance for Doubtful Accounts = Sum over age bands of (Band Balance x Expected Loss Percentage for the band)
Bad Debt Expense for the period = Required Allowance minus Existing Allowance (plus any specific write-offs during the period)
Percentage over 90 days = Balance over 90 days / Total Receivables x 100%
Worked example. A building products supplier's receivables aging at 30 September:
- Current (not yet due): $620,000
- 1 to 30 days overdue: $210,000
- 31 to 60 days overdue: $95,000
- 61 to 90 days overdue: $45,000
- Over 90 days overdue: $80,000
- Total receivables: $1,050,000
Expected loss percentages from the company's history: 1%, 4%, 12%, 30%, 65%.
- Current: $620,000 x 1% = $6,200
- 1 to 30: $210,000 x 4% = $8,400
- 31 to 60: $95,000 x 12% = $11,400
- 61 to 90: $45,000 x 30% = $13,500
- Over 90: $80,000 x 65% = $52,000
- Required allowance = $91,500
The existing allowance is $70,000, so bad debt expense for the quarter is $21,500. Net receivables reported = $1,050,000 minus $91,500 = $958,500.
Trend: three months earlier the over-90-day band was $40,000 (4% of receivables); it is now $80,000 (7.6%). Two customers account for $55,000 of it. The credit controller's priority list writes itself.
Lender's view: the bank advances 80% against receivables under 90 days and nothing against older balances. Borrowing base = 80% x ($1,050,000 minus $80,000) = $776,000.Case study
Seen in the real world.
A staffing agency with $4 million of receivables ran its aging report monthly but nobody acted on it; the finance manager filed it and the sales team, who owned the client relationships, never saw it. When a bank line came up for renewal, the bank's analyst produced the schedule and pointed out that $900,000, 22% of the total, was more than 90 days old, concentrated in six clients, and that the agency's allowance was $60,000. The bank cut its advance rate and required a monthly aging with commentary.
The agency assigned every client to a named account owner responsible for collections, put the aging on the weekly management agenda, stopped supplying staff to any client more than 60 days overdue, and wrote off $350,000 that the review showed was uncollectable. Within six months the over-90 band was under 5% of receivables and the bank restored the line. The finance manager's comment was that the report had been right every month; it had simply been addressed to no one.
Watch out
Common mistakes.
- Producing the schedule and not acting on it. Its value is entirely in the collections and credit decisions it drives.
- Aging from invoice date when terms are 60 days, or from due date when terms are 30, without being clear which. Consistency matters more than the convention.
- Applying loss percentages mechanically without judgement. A large balance in the over-90 band from a customer in administration is a near-total loss, whatever the historical average.
Questions
People also ask.
What are the standard aging bands?
Current, 1 to 30, 31 to 60, 61 to 90 and over 90 days overdue are the most common, though businesses with long terms may use wider bands.
How often should the aging schedule be reviewed?
Weekly for collections, monthly for management review and allowance calculation, and at every period end for the accounts.
Is a payables aging schedule useful too?
Yes. It shows which suppliers are overdue, helps schedule payments to take discounts and avoid penalties, and signals to outsiders whether the company is stretching its creditors.
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