The aging method takes place by sorting a company's accounts receivable according to the dates of these unpaid invoices. The invoice amounts that are not yet due are entered into the first of perhaps five columns. The invoice amounts that are 1-30 days past due are entered into the second column. Amounts that are 31-60 days past due are entered into the third column, and so on. (Accounting software will likely have a feature for generating an aging of accounts receivable.) The aging will be reviewed in order to determine the approximate amount of the receivables that may not be collected.
The goal of the aging method is to have the company's balance sheet report the true amount of the receivables that will be turning to cash. For example, if the company's Accounts Receivable has a debit balance of $89,400 but the company estimates (based on its aging) that only $82,000 will be collected, the Allowance account must report a credit balance of $7,400.
If a company fails to report a needed credit balance in its Allowance account, it will be overstating its assets, working capital, current ratio, retained earnings, and stockholders' equity. Its current period's earnings may also be overstated.
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