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Unformatted text preview: o “age” the accounts receivable. By
this process the firm can determine whether the problem exists in its accounts
receivable in general or is attributable to a few specific accounts. Aging of Accounts Receivable
aging of accounts receivable
A credit-monitoring technique
that uses a schedule that
indicates the percentages of the
total accounts receivable
balance that have been outstanding for specified periods of time. The aging of accounts receivable requires the firm’s accounts receivable to be
broken down into groups on the basis of the time of origin. The breakdown is
typically made on a month-by-month basis, going back 3 or 4 months. The result
is a schedule that indicates the percentages of the total accounts receivable balance that have been outstanding for specified periods of time. Its purpose is to
enable the firm to pinpoint problems.
If a firm with terms of net 30 has an average collection period (minus receipt,
processing, and collection time) of 50 days, the firm will want to age its accounts
receivable. If the majority of accounts are 2 months old, then the firm has a general problem and should review its accounts receivable operations. If th...
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