Then this is divided by the credit sales. Instead of multiplying it by 365 days, which are the number of days in a year, is done to avoid fractions in the calculations of aging accounts receivables. The aging accounts receivables are calculated by multiplying average accounts receivables by 360 days. The accounts receivables are based on sales which are done on credit. The formula for finding aging accounts receivables is as follows:Īging accounts receivables = (Average accounts receivables* 360 days)/ Credit Sales
#AVERAGE ACCOUNTS RECEIVABLE FORMULA HOW TO#
How to calculate aging accounts receivables?
This helped the company ABC not only tide over a financial crisis, but also improve its quality of service, which resulted in the Company ABC gaining more business. This was all possible because the company performed an accounts receivable aging process. It also improved its service which resulted in the existing clients giving it more of its business. The company ABC’s financial position gets strong as a result of dropping a bad client. The company ABC is facing some financial problems, and as a result drops restaurant E, because it cannot afford to wait three months to get paid. See also What are Relevance and Reliability in Accounting? The company ABC does a accounts receivables aging analytics and found out that Restaurant E possesses a higher risk because they pay their accounts after three months. Restaurant D pays the accounts receivables within a month, whereas restaurant E pays accounts receivables after 3 months. ExampleĬonsider a company ABC, which supplies beef to two restaurants D and E. It allows for the company to find doubtful accounts receivables, doubtful accounts receivables are those accounts receivables about which the company is not sure would either pay or not. The company then use accounts receivables aging to prioritize clients, and even refuse to sell to the clients their products or service which may possess a real credit risk for the company. ExplanationĪging Accounts receivables is a management and accounting tool which helps a company distinguish between clients which pay on time, and clients which are a credit risk to the company, because they pay their dues late. If a company is slowed to receive accounts receivables, it has a high accounts receivables aging, which shows the company is selling its product or service on credit more than usual, which means it is taking on a serious financial risk, because if the company does not get paid, its cash flow may dry up, which may result in losses for the company, and even eventual bankruptcy.
The accounts receivable aging is a very important accounting that helps to analyze the financial health of the company.
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