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Generally, the longer the account balance is overdue, the more likely it will be
uncollectable and will lead to a doubtful debt. Therefore, many firms create an
aging schedule of accounts receivables to follow the pattern of collecting their
account receivables and track the percentage of doubtful debts.
This schedule ranks each customer based on their total balance and
outstanding balance and calculates an estimated percentage of uncollected
accounts receivable as well as the total of bad debts. By keeping an aging
schedule, firms can easily find out which customers are paying their bills in due
time and which customers are less reliable, thus adjusting their credit policies.
In the long-term, they can calculate the impact of past due accounts
receivables on the firm’s cash flows.
Solved example:
Based on past experience, SG Tools estimates that 5% of not yet due, 10% of 0-30
days past due, 15% of 31-60 days past due, 25% of 61-90 days past due and 80% of
90+ days past due accounts receivable turn out uncollectible.
Benefits
The aging schedule can be used to identify the customers that are extending
the time it takes to collect your accounts receivable. If the bulk of the overdue
amount in receivables is attributable to one customer, then steps can be taken
to see that this customer's account is collected promptly. Overdue amounts
attributable to a number of customers may signal that your business needs to
tighten its credit policy toward new and existing customers.