The cross age rule in accounting, also referred to as the cross aging rule, states that if more than a certain percentage of the receivables for an individual account are overdue, then the entire account can be considered overdue. The cross age rule can have a significant impact on a business's credit policies, valuation and creditworthiness.
Example of the Cross Age Rule
Application of the cross age rule starts with determining what constitutes an overdue receivable and what percentage of overdue receivables is acceptable. For example, if an account has $10,000 in total receivables and $5,000 is overdue, the account would have an overdue percentage of 50 percent. If a business decided its threshold for overdue receivables was 10 percent, this account would become subject to the cross age rule. The overdue age and the threshold percentage vary by industry, type of business and the purpose of the valuation.
Internal Credit Policies
Businesses often use the cross age rule to determine internal credit policies. By cross aging the account, the business can justify placing a hold on new purchases for that account to prevent further defaults. This rule also can act as a trigger to start internal collection proceedings or send an account to an outside debt collector. Using this rule, a business can send the entire account into collections rather than just the overdue amount.
The cross age rule allows a business to declare an entire account uncollectable and write off the entire value of that account at tax time. That way, the business does not pay taxes on money it is owed but believes it will not ever collect. The rule also affects the valuation of a business, because it lets a business remove the value of an entire account that may prove too costly or impossible to recover.
Lenders look to the cross age rule to asses the true value of a business's accounts receivable, which is a key indicator of whether the business will have the revenue needed to repay the loan. Lenders often apply their own cross age rule when evaluating creditworthiness rather than using the rule established by the business. Prospective borrowers implement the cross age rule to keep from using the value of an overdue account as collateral for a loan.
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