What is the Aging Method?

The aging method is used to estimate the amount of uncollectible accounts receivable. The technique is to sort receivables into time buckets (usually of 30 days each) and assign a progressively higher percentage of expected defaults to each time bucket. The time buckets used typically follow this layout:

Current receivable (no collection activities)
1-30 days past due (modest bad debt risk)
31-60 days past due (significant bad debt risk)
61-90 days past due (more likely than not to be a bad debt)
90+ days past due (assumed to be a bad debt)

This time bucket reporting is readily available as a standard report in most accounting software packages. Many packages also allow you to alter the duration of each time bucket.

The total derived from this calculation should match the amount stated in the allowance for doubtful accounts contra account, which is paired with and offsets the trade receivables account. The net of these two account balances is the expected amount of cash that will be received from accounts receivable.

Example of the Aging Method

A company has $100,000 of accounts receivable. $80,000 of this amount is in the 0-30 days time bucket, $15,000 is in the 31-60 days time bucket, and the remaining $5,000 is in the 61-90 days bucket. From historical experience, the company accountant applies an estimated 3% bad debt percentage to the 0-30 days bucket, a 9% bad debt rate to the 31-60 days bucket, and a 25% rate to the 61-90 days bucket. This application of the aging method results in an estimated uncollectible accounts receivable amount of $5,000.