Most accounting systems offer A/P (accounts payable) aging reports to help managers control current liabilities. This report shows what a company owes, to whom and for how long. When cash is tight, it's common to schedule bill payments according to when they are due and not pay all bills at the same time.
An A/P aging report not only helps firms manage cash flows, but also allows them to take advantage of early payment discounts. This popular report contains detailed information, which management can use in identifying errors and discrepancies. The total on an aging report usually represents the total current liability of a business and should match the payable balance in the general ledger. For example, if an aging report shows that $200 is owed, this amount should be in the general ledger too. If that's not the case, research is required to identify problems and correct them.
Aging reports can be prepared by vendor, invoice dates, payment dates and other formats. The most common style shows vendor names to the right and four columns named "within 30 days," "between 30 and 60 days," " between 61 and 90 days," and "over 90 days." Numbers are placed within these columns depending on how long a bill is outstanding. Usually this report contains a "total" column to the right, where all column numbers are added up and a total liability is calculated
Besides making sure that bills are paid on time, managers use the A/P aging report to analyze cash flows and how the liabilities correlate with inventories and cost of goods sold. Financial ratios can be helpful in analysis, such as the "days payable" ratio, which is calculated by dividing the average accounts payable by cost of goods sold per day. When this ratio is too low or too high, it's time to analyze the aging and find areas that could be improved.
For aging reports to provide meaningful information, data entered on the accounts payable system should be accurate. Be sure that prior periods are closed to prevent the posting of entries to incorrect periods in the past. Also, look for duplicates in the accounts payable master file, a common problem in this area, where a vendor may have been entered more than once. Some systems allow for vendors to be merged easily, correcting the duplication of records problem. Use this function if available, because the alternative is to transfer the data manually, which is not an efficient process.