What does aging of accounts receivable mean?
Aging of accounts receivable is the classification of accounts receivable by various age categories. The balance in each class (e.g., current, 30, 45, 60, 90, and over 90 days past due) is then multiplied by the percentage probability of collection based on past collection history and management judgment (e.g., there may be a 90% likelihood that an account 30 days past due will be collected, while the probability drops to 25% when the account is over 90 days past due). This represents a form of expected value—the expected value of the collectible accounts. The allowance is the difference between this estimated collectible amount and the total amount in accounts receivable.
