Accounts Receivable Aging

Start by reconciling the aging total to the receivables control account in the general ledger at the same date. Then look at the profile of the balances.
Compare the profile with the business’s actual customer terms and collection history. There is no universal healthy mix of buckets. Long contractual payment terms need a different interpretation from immediate payment on delivery.
What we are looking for is the pattern underneath:

An aging can contain invoices carried forward for years without a clear explanation.

In our transaction discussions, we distinguish isolated delayed payments from an accumulation of old balances. Request subsequent receipts, collection correspondence and the basis for any allowance. Age alone does not decide whether the balance is collectible or when an accounting adjustment belongs.

Where supporting records are missing, document the uncertainty and the work needed to resolve it. Do not turn one unexplained balance into a conclusion about the entire balance sheet.

This connects directly to net working capital. The purchase agreement determines which balances and calculation policies apply. Document proposed exclusions and allowances rather than assuming all receivables transfer at face value.

The counterpart to uncollected receivables is an allowance for doubtful accounts that exists only as a number.

Our review questions include whether the allowance has a supporting calculation and whether adjustment accounts have been reconciled. A round number is not automatically wrong. Assess the assumptions, collection history and invoice-level evidence before proposing a change. BDC’s receivables overview explains the underlying asset, payment terms and doubtful-debt provisions.

This is the part that is not obvious, and it is why the aging matters far beyond collections.

Disputed invoices may reveal a disagreement about delivery, progress or billing. Compare the aging with contracts, progress reports, credit notes and customer correspondence. A lengthening tail can prompt that work, but does not establish the cause on its own.

The aging is an internally generated report. Testing it against supporting documents and subsequent receipts can inform the revenue review, particularly in project businesses. See work in progress for related questions.

Show retainage separately. A contract can explain why a balance remains outstanding, but does not guarantee payment. Confirm release conditions, project status and any disputes before deciding whether the delay is expected. See retainage.

The first pass produces a list. The second request asks about individual invoices by number and date, and the question is always the same three-way split:

Days sales outstanding is a separate calculation using receivables and sales data, not simply an average of the aging buckets. Movement in it can prompt a wider investigation.

Where DSO stretches from roughly ninety days to a hundred and twenty, that is not a conclusion, it is a prompt. Is there a stale balance that should have been written off? Is there a bad debt nobody recognised? Has a large customer started paying slower, which is a concentration question rather than a collections one?

This is also why receivables work has to happen before adjusted EBITDA can be finalised on many engagements. You cannot always know what the earnings adjustments are until the balance sheet work has told you what is real. The reconciliations come first, then the analysis, then the adjusted figure. See the cash conversion cycle for how DSO sits alongside the other working capital metrics.

The aging tells you what is owed. Tracing tells you whether it is real.

We trace selected invoices to the general ledger and, where collected, the bank receipt. Agreement supports the transactions tested. It does not prove that every receivable is collectible or that all revenue belongs in the recorded period.

One thing worth knowing if you are on the receiving end of this request: the three figures often will not tie line for line, and that is usually fine. A single ledger entry may correspond to an invoice covering many separate items, and deposits are frequently batched, so one bank credit covers several invoices. Neither is a problem. It just means the trace takes longer, and it is smoother if you can explain your billing structure up front. The proof of cash covers the same ground at the aggregate level.

A business serving commercial customers and one serving consumers produce entirely different agings, and comparing either to a generic benchmark is misleading.

Commercial and residential divisions may have different terms, deposits, billing milestones and collection histories. Test those differences from the records. The customer’s classification alone does not establish credit quality or bad-debt risk.

Where a business runs both inside one entity, the aging needs to be looked at by division. A blended view describes neither, and it will usually make the commercial side look worse than it is.