Aging of Accounts Receivable
Module 3:
Cash, Receivables, Payables
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Understand what an Aging of Accounts Receivable is
➛ Prepare an aging schedule
➛ Estimate uncollectible accounts using the aging method
➛ Record the correct adjusting entry for bad debts
➛ Explain why the aging method is preferred under GAAP
Key Vocabulary
➛ Aging of Accounts Receivable
➛ Current
➛ Past Due
➛ Net Realizable Value
➛ Estimated Uncollectible
Concept Explanation
The Aging of Accounts Receivable is a method used to estimate bad debts by grouping customer balances according to how long they have been unpaid.
Key idea
The older the receivable, the less likely it is to be collected.
This method focuses on the balance sheet, not the income statement.
Typical Aging Categories
Age of Receivable
Current | 0-30 days
31-60 days
61-90 days
Over 90 days
Current | 0-30 days
31-60 days
61-90 days
Over 90 days
Example
Very collectible
Slight risk
Higher risk
High risk
Very collectible
Slight risk
Higher risk
High risk
Example Aging Schedule
Age Category
Current
31-60 days
61-90 days
Over 90 days
Total
Current
31-60 days
61-90 days
Over 90 days
Total
Amount
10,000
5,000
3,000
2,000
20,000
10,000
5,000
3,000
2,000
20,000
Estimated % Uncollectible
2%
5%
10%
30%
2%
5%
10%
30%
Estimated Bad Debt
200
250
300
600
1,350
200
250
300
600
1,350
Adjusting Entry | General Form
If adjustment is needed
Bad Debt Expense
Allowance for Doubtful Accounts
Allowance for Doubtful Accounts
Dr
Cr
Cr
The amount recorded depends on the existing balance in the allowance account.
Why Aging Method Is Preferred
➛ More accurate estimation
➛ Matches receivables with realistic collectability
➛ GAAP-approved
➛ Focuses on Net Accounts Receivable
Identify Aging Categories
Which accounts are used in the Aging of Accounts Receivable method?
➛ Accounts Receivable
➛ Allowance for Doubtful Accounts
➛ Cash
➛ Accounts Payable
➛ Service Revenue
Aging Schedule Calculation
Age Category
Current
31-60 days
61-90 days
Over 90 days
Current
31-60 days
61-90 days
Over 90 days
Amount
10,000
5,000
3,000
2,000
10,000
5,000
3,000
2,000
Estimated %
2%
5%
10%
30%
2%
5%
10%
30%
Key Exam Tips
➛ Aging method = Balance Sheet approach
➛ Focuses on ending balance of allowance
➛ Different age groups = different risk percentages
➛ Older receivables = higher uncollectible %
Adjusting Entry | 1
Allowance has zero balance
Adjusting Entry | 2
Allowance has existing credit balance of $400
Required balance = 1,350
Existing balance = 400
Adjustment needed
1,350 – 400 = 950
Adjusting Entry | 3
Allowance has debit balance of $200
Required balance = 1,350
Adjustment needed
1,350 + 200 = 1,550
Net Realizable Value
Accounts Receivable: 20,000
Allowance for Doubtful Accounts: 1,350
True or False
➛ Aging method focuses on balance sheet
➛ Older receivables are more collectible
➛ Different age groups use same percentage
➛ Allowance account is a contra-asset
➛ Aging method estimates expense directly
Quick Quiz
➛ Purpose of aging method
➛ Which accounting approach does aging follow?
➛ Which account is reduced to show collectability?
➛ Older receivables are assigned
➛ GAAP prefers aging because
Answers ➧ Here
Accounts Payable ➧ Here