The accounts receivable aging report is one of the most used documents in any small company's books. Credit managers use it to chase collections, controllers use it to set the allowance, lenders use it to compute a borrowing base and auditors use it as the population for receivables testing. Because so many decisions rely on it, an aging that is wrong in a systematic way can mislead everyone at once.
This post covers how to read an aging, how to turn it into an allowance for doubtful accounts (now called the allowance for credit losses under ASC 326), and the audit procedures for receivables. For the full CECL model, including ASU 2025-05, see CECL for private companies.
What an AR aging report shows
An aging report lists open customer balances and sorts them into time buckets. The typical columns are:
- customer name and number
- total balance
- current (not yet due, or zero to 30 days)
- 31–60 days
- 61–90 days
- over 90 days
A detailed aging lists each open invoice. A summary aging shows one row per customer. Auditors need the detailed version, because summary totals hide how old the individual items are.
Aged by invoice date or due date?
Agings can measure age from the invoice date or from the due date. The two give very different pictures when payment terms vary. A customer on 60-day terms looks overdue on an invoice-date aging after 30 days but is current on a due-date aging. Know which basis the report uses, use it consistently, and make sure the loss rates were developed on the same basis.
Reading the aging critically
When you first open an aging, look for:
- Concentration: a few customers holding a large share of the balance, which may require disclosure under ASC 275 and focused testing.
- Credit balances: customer overpayments or unapplied credits that net down the total. Significant credit balances are reclassified to liabilities.
- Unapplied cash: payments posted to the customer but not matched to invoices, which can make old invoices look open and recent ones look paid.
- Old small items: a long tail of small balances over 90 days, often short payments, disputed freight or pricing differences no one has written off.
- Related parties: balances due from owners, affiliates or employees mixed into trade receivables. See related party transactions.
- Movement in the older buckets: a customer whose balance moves from 61–90 to current with no cash received may have been re-invoiced, which can signal manipulation.
From aging to allowance
Why the direct write-off method is not GAAP
Small companies sometimes write off bad debts only when an account is clearly uncollectible. That direct write-off method is not acceptable under US GAAP unless the effect is immaterial, because it does not record expected losses on receivables at the reporting date. GAAP requires an allowance.
The aging-based loss-rate method
Under ASC 326, the allowance reflects credit losses expected over the contractual life of the receivables, using historical experience, current conditions and reasonable and supportable forecasts. An aging schedule with loss rates by bucket is an acceptable way to do that. The usual steps:
- Gather history. For a historical period, track how balances in each aging bucket were ultimately collected or written off.
- Compute historical loss rates by bucket, such as the share of balances in the over-90 bucket that were eventually written off.
- Adjust for current conditions, for example a deterioration in a customer segment, a change in credit policy or an economic downturn in a key industry.
- Adjust for reasonable and supportable forecasts, unless the ASU 2025-05 practical expedient applies to current receivables.
- Pool receivables with similar risk characteristics, such as customer type, industry or geography, and calculate rates separately where pools behave differently.
- Evaluate specific accounts individually when they no longer share risk characteristics with the pool, such as a customer in bankruptcy, and remove them from the pool.
- Apply the rates to the current aging and compare the result with the recorded allowance.
The AR aging and CECL allowance calculator applies bucket loss rates, adjustments and specific reserves to an aging and compares the result with the recorded allowance.
Documentation the allowance needs
The allowance memo should explain the method, the historical period used and why, the pools, the loss rates and their source, the qualitative adjustments and how they were quantified, and specific reserves. A qualitative adjustment with no stated basis cannot be supported or tested.
Rollforward
Prepare an allowance rollforward: beginning balance, provision, write-offs, recoveries and ending balance. Compare write-offs with the prior-year allowance. If actual write-offs consistently exceed the allowance set the year before, the method understates expected losses.
Audit procedures for receivables
Receivables address existence, completeness, accuracy and valuation, and rights. The procedures below are the typical core; tailor them to the assessed risks under AU-C 315. See audit assertions for how each assertion maps to procedures.
1. Tie the aging to the general ledger
Foot the aging, cross-foot the buckets and agree the total to the AR control account. Investigate reconciling items, which are often manual journal entries, unapplied cash or a subledger out of sync with the ledger. Use the lead schedule template to tie each account to the trial balance.
2. Test the aging's accuracy
The allowance depends on invoices being in the right bucket. Select invoices from each bucket and agree the invoice date (or due date) and amount to the invoice. Re-bucket them yourself. If the report is system-generated, also understand the report logic and the parameters used, such as the as-of date. This is information produced by the entity, and AU-C 500 requires the auditor to evaluate whether it is sufficiently reliable for the auditor's purposes. The IPE testing worksheet is designed for this.
3. Confirm balances
Confirmation of accounts receivable is presumed under AU-C 330 unless the overall account balance is immaterial, confirmation would be ineffective, or the assessed risk is low and other substantive procedures address it. Document the reasoning if you do not confirm. Select balances, send positive or negative requests as appropriate, follow up nonresponses with alternative procedures and investigate exceptions. The detailed procedure is in audit confirmations under AU-C 505, and a request form is in the AR confirmation letter template.
4. Test subsequent receipts
For selected year-end invoices, trace cash received after year end to the bank statement and the remittance advice, and confirm that the payment applies to the specific year-end invoice. Subsequent receipts are strong evidence of existence and valuation. A common error is counting a payment of a new January invoice as collection of the December balance. Read the remittance detail.
5. Evaluate the allowance
Allowance testing is an accounting estimate under AU-C 540:
- test the historical data used to compute loss rates
- recompute the loss rates and the allowance
- evaluate the qualitative and forecast adjustments for support and bias
- review specific reserves against subsequent receipts, correspondence and news about customers
- perform a retrospective review of last year's allowance against actual write-offs and collections
6. Look at credit memos and write-offs
Review credit memos issued after year end for items that should reduce year-end revenue and receivables. Review write-offs during the year for approval and whether they were reserved. See cutoff testing for revenue and receivables cutoff.
7. Rights and presentation
Read loan agreements for receivables pledged as collateral or factored, which may need disclosure or affect derecognition. Reclassify significant credit balances to liabilities. Separate related party and employee receivables and noncurrent amounts.
Red flags in receivables
- old balances that keep moving to current without cash
- lapping, where cash from one customer is applied to another customer's older balance to hide a theft, often visible as remittances that do not match the invoices they paid
- confirmations returned from addresses connected to the company or its employees
- large balances with new customers recorded near year end
- an allowance that stays at the same percentage of receivables every year regardless of aging changes
- borrowing base certificates that do not agree to the aging
Misstatements found in receivables or the allowance go to the summary of misstatements under AU-C 450.
Frequently asked questions
What is an accounts receivable aging report?
It is a report that lists open customer balances by how long they have been outstanding, usually in buckets such as current, 31–60, 61–90 and over 90 days. It is used for collections, the allowance, borrowing base reporting and audit testing.
Is the allowance for doubtful accounts the same as the allowance for credit losses?
In practice, yes. Allowance for credit losses is the term used in ASC 326 after CECL. Many companies still call it the allowance for doubtful accounts, and the aging-based method remains acceptable if supported.
Can a small company use the direct write-off method?
Only if the effect is immaterial. US GAAP requires an allowance for expected credit losses at the reporting date, and the direct write-off method does not provide one.
Why do auditors test the aging buckets?
Because the allowance applies different loss rates to each bucket. If invoices are aged incorrectly, the allowance is wrong even when the loss rates are reasonable, so auditors agree a sample of invoices to source dates.
Are accounts receivable confirmations required?
AU-C 330 presumes confirmation of accounts receivable unless the balance is immaterial, confirmation would be ineffective, or the risk is low and other procedures are sufficient. If the auditor does not confirm, the reasons must be documented.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- FASB ASC 326-20, Financial Instruments, Credit Losses, Measured at Amortized Cost (CECL)
- FASB ASU 2025-05, Measurement of Credit Losses for Accounts Receivable and Contract Assets
- FASB ASC 275-10 (risks and uncertainties, concentrations)
- AICPA, AU-C Section 315, Section 330, Section 450, Section 500, Section 505 and Section 540
Part of CORAA University · Evidence and audit procedures: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error