Aging of Accounts Receivable Method: Formula, Example and Journal Entry

The aging of accounts receivable method estimates bad debt by sorting receivables into buckets by days past due, applying an estimated loss rate to each bucket, and summing the results to get the required ending balance of the allowance for doubtful accounts. The bad debt expense entry is then the plug: the amount that moves the allowance from whatever it already holds to that target.

That last sentence is the part people get wrong, and it is worth reading twice. The number the aging schedule produces is a balance, not an expense. Everything below turns on that distinction, including the arithmetic that changes when your allowance is already carrying a debit balance.

Last updated July 2026. General information for US GAAP reporters, not accounting advice for your specific facts.

What is the aging of accounts receivable method?

The aging method (also called the aging of receivables method, the balance sheet approach, or a provision matrix) estimates expected credit losses on the theory that an invoice's age is the best available predictor of whether it will ever be paid. An invoice 15 days past due is a scheduling problem. The same invoice at 120 days is usually a different kind of problem.

So instead of applying one blended rate to your whole receivables balance, you segment by how overdue each invoice is and apply a different, higher loss rate to each older bucket. It is a loss-rate method delivered through an aging schedule, and ASC 326-20-30-3 explicitly lists "methods that utilize an aging schedule" among acceptable approaches.

Is the aging method still allowed under CECL?

Yes. This comes up constantly, because ASC 326 (CECL) replaced the old incurred-loss model and people reasonably assume the classic textbook method went with it. It did not. Beyond the explicit blessing in ASC 326-20-30-3, FASB wrote an entire worked example for trade receivables around it: ASC 326-20-55-37, "Example 5: Estimating Expected Credit Losses for Trade Receivables using an Aging Schedule."

What CECL changed is not the mechanics but the inputs. Your bucket rates must reflect your own historical loss experience, adjusted for current conditions and reasonable and supportable forecasts of future conditions. And critically, the current bucket cannot be zero just because nothing is late yet.

How the aging method works, step by step

1. Age the receivables. Sort every open invoice into buckets by days past due as of the reporting date.
2. Pool by risk. Group receivables that share similar risk characteristics and run the matrix at that level rather than applying one set of rates across dissimilar customers.
3. Set a loss rate per bucket from your own history, adjusted for current conditions and forecasts.
4. Multiply and sum. Each bucket's balance times its rate; the total is the required ending allowance balance.
5. Plug the difference. Compare that target to the allowance's existing balance. The difference is bad debt expense.

Aging of accounts receivable method example

Rather than invent numbers, here is FASB's own Example 5, which is the most defensible illustration available because it is the one in the codification.

Entity E manufactures and sells products to a broad range of customers, primarily retail stores, on payment terms of 90 days with a 2% discount if paid within 60 days. Entity E concluded its historical loss data is a reasonable starting point, because the composition and risk characteristics of its portfolio have not changed significantly. Its historical loss rates by bucket (ASC 326-20-55-38):

Past-due status	Historical loss rate
Current	0.3%
1 to 30 days past due	8%
31 to 60 days past due	26%
61 to 90 days past due	58%
More than 90 days past due	82%

Then the forward-looking adjustment. Unemployment has decreased as of the reporting date and Entity E expects a further decrease over the next year, so it estimates loss rates will fall by approximately 10% in each bucket (a relative 10% haircut: 0.3% becomes 0.27%, 8% becomes 7.2%, and so on). Applying the adjusted rates:

Past-due status	Amortized cost basis	Credit loss rate	Expected credit loss
Current	$5,984,698	0.27%	$16,159
1 to 30 days past due	8,272	7.2%	596
31 to 60 days past due	2,882	23.4%	674
61 to 90 days past due	842	52.2%	440
More than 90 days past due	1,100	73.8%	812
Total	$5,997,794		$18,681

Two things in this table are worth pausing on, because they run against most people's intuition.

The current bucket produces 86% of the allowance. $16,159 of the $18,681 total comes from receivables that are not late at all. The rate is tiny (0.27%) but the balance is enormous, and volume wins. This is the CECL point in one line: healthy, current receivables still carry expected loss, and a model that reserves only against overdue invoices is not compliant.

The forward-looking adjustment made the allowance smaller. Entity E's economic outlook improved, so the rates came down. CECL is often described as a standard that inflates reserves. It is a standard that makes them reflect expectations, and expectations sometimes improve.

How to calculate bad debt expense from the aging schedule

Now the plug. The schedule says the allowance must end at $18,681. What you book depends entirely on where the allowance already sits.

Case A: the allowance already has a $12,000 credit balance

Required ending balance          $18,681
Less existing credit balance     (12,000)
Bad debt expense (the plug)      $ 6,681

Dr  Bad Debt Expense                       6,681
    Cr  Allowance for Doubtful Accounts    6,681

The allowance ends at $18,681. You only booked $6,681 of expense, because $12,000 of the reserve was already there from prior periods.

Case B: the allowance has a $2,000 debit balance

A debit balance happens when write-offs during the year exceeded the allowance you had set aside, which is a signal your prior estimate was too low.

Required ending balance          $18,681
Add back the debit balance         2,000
Bad debt expense (the plug)      $20,681

Dr  Bad Debt Expense                      20,681
    Cr  Allowance for Doubtful Accounts   20,681

The rule in one line: an existing credit balance is subtracted from the target and reduces the expense; an existing debit balance is added to the target and increases it. You are not computing an expense, you are steering a balance to a number, and the expense is the steering.

The contrast with percentage-of-sales makes the point. Under that method, both cases would produce the same expense, because the existing balance is ignored entirely. Under the aging method the existing balance is the whole calculation. We cover that comparison and the journal entries in the allowance for doubtful accounts guide.

The roll-forward that ties it together: Beginning allowance + bad debt expense minus write-offs plus recoveries = ending allowance, solved for expense.

What are the aging buckets for accounts receivable?

The buckets in FASB's example (current, 1 to 30, 31 to 60, 61 to 90, more than 90 days past due) are the most common convention and a reasonable default. But note Entity E sells on 90-day terms, and buckets should follow your terms rather than a template. A business on net 30 has a customer at 45 days who is meaningfully late; on Entity E's terms, that invoice is not due yet. Same number of days, opposite meaning.

The rates are entity-specific and there are no GAAP-prescribed percentages. Entity E's 82% for the 90-plus bucket reflects Entity E's history with Entity E's retail customers. Borrowing those numbers because you also sell to retailers is not support for an estimate. If you want the operational read of the same schedule rather than the accounting one, that is the accounts receivable aging report.

Do I still need forecasts? The ASU 2025-05 expedient

Maybe not, and this is new enough that most guidance online predates it. FASB issued ASU 2025-05 on July 30, 2025, adding a practical expedient at ASC 326-20-30-10C: an entity may elect to assume that current conditions as of the balance sheet date do not change for the remaining life of the asset. That removes the requirement to build reasonable and supportable forecasts for current AR and current contract assets.

It is available to all entities, public and private (it was proposed as private-only and expanded before the final standard), and it is effective for annual periods beginning after December 15, 2025, including interim periods within them, with early adoption permitted and prospective transition. For a calendar-year filer, that is in effect now.

Applied to Example 5, the expedient changes the answer. Entity E's 10% haircut came from forecasting a further decrease in unemployment over the next year. An entity electing the expedient holds current conditions constant and does not make that adjustment, so it would use the unadjusted historical rates. FASB added Example 5A (ASC 326-20-55-40A onward) to illustrate the expedient, with four cases covering the election, a receivable that does not meet the "current" definition, and the election combined with the non-public accounting policy election. Example 5 and Example 5A now coexist: Example 5 for entities not electing, 5A for those that do.

What the expedient does not do is let you ignore what is in front of you. ASC 326-20-30-10D still requires you to adjust historical loss information for current conditions your history does not already reflect. FASB's examples: a specific customer in financial distress, a decision to extend credit to lower-quality customers, or a recession that started before the balance sheet date. You may stop forecasting. You may not stop looking.

Aging method vs percentage of sales: which should you use?

	Aging method	Percentage of sales
Type	Balance sheet approach	Income statement approach
Produces	Required ending allowance balance	The expense directly
Precision	Higher: reflects actual composition of the book	Lower: blind to whether AR is current or ancient
Effort	Requires a clean, accurate aging	Minimal
Reporting-date fit	Meets ASC 326-20-30-1 directly	Must be trued up to a balance-sheet estimate

For most companies the aging method is the right answer at the reporting date, and percentage-of-sales survives as an interim convenience that gets trued up. ASC 326-20-30-1 asks for the amount necessary to adjust the allowance to a current estimate at the reporting date, which is a balance-sheet question, and the aging method answers a balance-sheet question.

The input nobody audits: whether your aging is true

Every number above rests on an assumption that deserves more scrutiny than it gets. The aging schedule has to be right.

It usually is not, and the culprit is cash application. When payments arrive without clean remittance detail and sit unapplied, the invoices they were meant to clear keep aging. They march into the 61-to-90 bucket at a 52% loss rate and into the 90-plus bucket at 74%, and your schedule dutifully reserves against money that is already in your bank account. You over-reserve, you understate earnings, and your team chases customers who have paid, which is the fastest way to lose the standing your escalation depends on. The mechanics are in the cash application process guide.

The other input is the loss rates, and those are a scoreboard for your own collections. If invoices in your 61-to-90 bucket go bad 52% of the time, that is a fact about your follow-up as much as about your customers. Chase consistently and fewer invoices reach the expensive buckets, so both the exposure and, as history accumulates, the rate itself come down.

That is the case for making the follow-up automatic rather than dependent on someone having a spare afternoon. Accounts receivable automation software like AccountsReceivable.ai chases every open invoice across email, SMS and live AI phone calls, applies incoming cash so the aging that drives your estimate is accurate, and predicts a pay date per customer. The estimate gets easier to defend because the book underneath it got healthier. For the metrics that move first, see the accounts receivable KPIs guide.