Age analysis is simply a time-based analysis with reference to due date to determine either how much time is left until due date or how much time has passed since due date. Most of the time age or aged or ageing analysis refers to the second type of analysis i.e. how much time has passed since due date and this analysis is used in context of receivables to determine steps required to recover debts from debtors. This also help in determining bad debts. In case of creditors usually the first type of analysis is prepared i.e. how much time is left until supplier’s invoice falls due so that entity can plan for outflows accordingly before time.
Sales and purchases on credit basis is part and parcel of business and due to credit based activities debtors (or receivables) and creditors (or payables) arises. Although the receivables are not received or payables are not paid immediately but such cash inflows and outflows respectively needs to be made within reasonable time. If payments towards creditors are delayed then it hurts goodwill and can also put entity in serious disputes and case laws. On the other hand if receivables are delayed then it hurts entity’s liquidity and hence keep entity from making investments or pay creditors on time and thus might have to take loan to make payments towards liabilities and hence put a burden on entity’s profits. In short if these inflows and outflows do not occur on time then entity might face financial issues.
Ideally the cash flows should occur on due date as mentioned on invoice. For example, your debtors should pay you by the date mentioned on the invoice you sent and you you should pay your creditors by the due date as mentioned on the invoice sent by them.
Age analysis help us compute how long the time has passed since due date. So due date acts as a reference point. Longer the time has passed higher the age will be of unpaid invoices. In simple words this analysis help us identify the invoices that are past due and for how long they are outstanding usually in terms of days. Sometimes age is determined in terms of weeks, months or quarters as well but most commonly days are used as a measure.
Past due means the due date has already passed. For example if invoice is 30 days past due it means 30 days has passed since invoice has fallen due.
Aged analysis help us determine at a particular date whether invoices are due or not. If they are due then how many days have passed since they are due.
The ageing analysis is usually constructed on a factor of 30 days. If ageing analysis is about debtors than usually management is interested in knowing how much time has passed since invoice has fallen due and it is still unpaid. The analysis is done as follows:
- Not due: The invoices which that has not fallen due yet
- Current: The invoices that fall due on the current date
- 30 days: The invoices that are past due for days between 1 to 30 days.
- 60 days: The invoices that are past due for days between 31 to 60 days
- 90 days: The invoices that are past due for days between 61 to 90 days
- 120 days: The invoices that are past due for days between 91 to 120 days.
- >120 days: The invoices that are past due for more than 120 days.
These days such analysis are conducted easily through built-in features in computerized financial accounting and reporting software. These analysis can also be done using spreadsheet programs like Excel which is famous for producing such reports.