As a business owner, you will need to understand the concept of an aged trial balance. An aged trial balance can be used to determine how long your company’s debts have been outstanding.
It can also show how long your receivables have been overdue. The type of report that you decide to read will be determined by whether you are concerned about your customers or your vendors.
What Is an Aged Accounts Receivable?
An aged accounts receivable is a type of aged trial balance report. It provides a listing of all of your customers and the amounts due from them. The AR aging will provide these amounts in aging buckets. These buckets will include a current column and typically other buckets such as over 30, over 60, and over 90.
All of these balances will be helpful to you as you determine which customer accounts have outstanding balances. You will want to follow up on receivable balances that are past due to prevent them from becoming uncollectible accounts that need to be written off on the income statement as bad debt expenses.
If you find that the receivable aging report shows a lot of customers with older outstanding balances, you may want to reconsider your credit sales policy.
As accounts receivable balances age, it becomes less likely for them to be collected, and they may become doubtful accounts. You can establish new credit terms limiting the time that your customers have to pay before their balances become overdue.
What Is an Aged Accounts Payable Report?
Similar to an aged accounts receivable report, the aged accounts payable report provides a list of all of your current vendors and the amounts that you owe to them.
The amounts will be presented as a list by supplier and aging periods. The aging periods indicate the number of days that it has been since the invoice was first received from your supplier. Usually, the invoice is recorded in the general ledger according to its original invoice date.
It’s not uncommon for companies to try to extend payment terms with their vendors and pay their balances late. This approach can help them if they are struggling with cash flow issues or want to improve their working capital.
However, before deciding to pay vendors past the due date, it’s important to try to negotiate longer payment terms. You don’t want vendors who are important to your business to become angry.
When running an aging report, make sure to set the date range appropriately. You can set an as-of-date reflective of the time period you are attempting to view. If you like, you can also run a historical aged trial balance to compare your company’s current payables status with that of a prior date.
Why Is It Important to Know Which Accounts Are Aged?
By understanding how quickly your customers are paying, you’ll be in a better position to decide whether your credit sales policy is appropriate or if it is causing issues.
If you have numerous clients with overdue accounts receivable balances, this points to an issue in ensuring the collection of your accounts. You may need to engage in better follow up with your customers to collect amounts due. It’s possible that you may choose not to work with certain clients if they constantly ignore their balances.
From a payables point of view, understanding the amount of time it takes to pay your vendors can help you determine whether your own payment policies are sound. You don’t want to alienate valuable business partners by consistently paying them late.
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