An accounting technique whereby accounts are classified according to their aging- i.e., due dates or billing dates, in order to measure realization risk. This allows a business to have an idea about those accounts that have to be paid first and/or received first. This involves the process of itemizing transactions into time units/ buckets over the course of previous financial periods. For example, time buckets (break down or aging schedule) for accounts receivable A/R are usually set as follows:
0-30 days old —– current.
3- 60 days old —- slightly overdue.
61- 90 days old — overdue.
Above 90 ——– past due.
The aging of accounts receivable helps a business to figure out bad debts.
Aging can be implemented for other accounts such as accounts payable A/P, fixed assets, inventory, etc.
