Movie Case Study
The above scene shows Adaline going to a party. She checks her hair in the mirror for a moment and moves on. She comes back, only to realize that she has grey hair. This makes her happy as she had not been physically aging for a long time.
In this blog, Learning Perspectives will explore the meaning of Aging in accounts.
What is Aging in Accounts?
Aging is the process of becoming older with time. This is a natural biological process. Aging in accounts is similar too. Accounts receivable is a term used in accounts that are reported as current assets on the balance sheet.
Receivables as the name suggest money that will be received by the companies from the borrowers at a future date. This is generally true for all companies but especially true for banks and financial lenders.
Accounts receivable aging report is prepared by the company to ascertain the company’s receivables. It reveals the financial health of the company. If the receivables are being recovered at a slower pace than usual, then it shows that the company might face a credit risk.
Aging tables are used to calculate bad-debts
Bad debts occur when an individual/business is not able to fulfill its obligation to pay back the loan or credit that was granted to them. When banks give out loans to customers, they are classified as an asset for the bank. All these loans are grouped together on the asset side of the balance sheet as personal loans, vehicle loans, student loans, etc. These loans are generally long-term in nature.
Bad debts occur even in case short term, i.e. within 1 year’s time. If an individual or a business is unable to pay within 90 days of their loan limit, they are considered bad debt. It can also mean that this debt is going bad. Most likely the individual won’t pay the remaining amount. This table helps in understanding the amount that needs to be written off from the books.
Understand Aging in Accounts with a Video
Now, when an individual/company defaults on the payment then after 90 days of non-payment of the loan, this asset is classified as non-performing (NPA). This NPA after 12 months becomes a doubtful asset.
How to draw the aging table?
|Above 90 days
The above table shows the payment summary of accounts receivables from different companies. The table is divided into a 30-day time period. This table is quite common across organizations. ABC company seems to be not paying its obligations on time. Most of their payments are overdue while company XYZ is the best performing.
This table gives us insight into how the company’s clients are behaving. This table gives the company an overview to understand its credit risk and make better decisions.