Definition of Aging Method
The aging method usually refers to the technique for estimating the amount of a company's accounts receivable that will not be collected. The estimated amount that will not be collected should be the credit balance in the contra asset account Allowance for Doubtful Accounts. The debit balance in Accounts Receivable minus the credit balance in Allowance for Doubtful Accounts will result in the estimated amount of the receivables that will be converted to cash.
The aging method sorts each customer's unpaid invoices by invoice date into perhaps four columns:
- Column 1 lists the invoice amounts that are not yet due
- Column 2 lists the invoice amounts that are 1-30 days past due
- Column 3 lists the invoice amounts that are 31-60 days past due
- Column 4 lists the invoice amounts that are more than 61 days past due
Accounting software will likely have a feature that generates the aging of accounts receivable.
Example of Aging Method
Let's assume that a company's Accounts Receivable has a debit balance of $89,400. The aging method indicates that most of the customers are current. However, there are a few customers' invoices that are more than 60 days past due. Those past due accounts are reviewed closely and based on each customer's information it is estimated that approximately $7,400 of the $89,400 will not be collected. Therefore the credit balance in the Allowance for Doubtful Accounts must be $7,400. This will result in the balance sheet reporting Accounts Receivable (Net) of $82,000.
