Two businesses can report identical accounts receivable balances and be worth very different amounts, because the number on the balance sheet says nothing about how likely that money actually is to arrive. An aging report, read alongside how the business collects and what happens to it on a sale, closes that gap.
Key takeaways
A receivable from a customer who reliably pays within thirty days is worth close to its face value; a receivable that has been outstanding for a year from a customer who has stopped answering calls is worth a great deal less (treadstonelaw, reviewing accounts receivable). That gap is exactly what a formal aging analysis is built to surface, sorting every open invoice into bands by how overdue it is.
The standard framework runs from current or not-yet-due invoices — normal course of business, limited concern — through 1–30 days past due, still within a reasonable range, to 31–60 days, where collectibility concern increases, 61–90 days, meaningfully higher risk, and over 90 days, often treated as largely uncollectible (treadstonelaw, reviewing accounts receivable). The same source flags what to look at beyond the aging bands themselves: customer concentration risk, historical write-off patterns, how disciplined the business has been about credit enforcement, unresolved disputes affecting collection, and related-party receivables, which deserve separate scrutiny from ordinary trade debt (treadstonelaw).
Buyers should cross-check the aging report against actual collections history and, where possible, bank deposits, rather than relying on the report alone (treadstonelaw) — a technique that requires no contact with the target’s customers at all, and is available before any confidentiality restriction on outreach would even come into play. If invoices marked as collected in the aging schedule do not correspond to actual deposits in the bank records over the same period, that mismatch is worth resolving before it is worth explaining away.
ITA s. 20(1)(p) allows a deduction for debts “established by the taxpayer to have become bad debts in the year” — but only for debts “that have been included in computing the taxpayer's income” in the current or a prior year (ITA s. 20(1)(p)). A receivable never taken into income in the first place cannot generate a bad debt deduction when it goes unpaid; the deduction follows the accrual, not the disappointment.
Where receivables change hands as part of a business sale, a joint election under ITA s. 22 (ITA s. 22) lets the seller and buyer agree the receivables are being sold at their actual, discounted value rather than face value, giving the seller consistent bad-debt tax treatment and letting the buyer treat amounts that later prove uncollectible the same way (treadstonelaw, section 22 election). It is a two-party tool — both sides have to agree to make the election and typically need to file supporting documentation with their own returns (treadstonelaw) — and it has to be addressed as part of the deal itself, not sorted out afterward.
Where the aging report raises real concerns, buyers typically respond with one or more of: a discount against face value of the receivables, a working capital adjustment tied to the actual collected figure, specific warranties about collectibility, or a post-closing holdback released only as receivables are actually collected (treadstonelaw) — each of which shifts collection risk back toward the seller in a different way, without requiring the deal to fall apart over a number neither side can fully verify before closing.
An amount owed to the business by a shareholder, a related company, or a person the owner controls is not the same kind of asset as a trade receivable from an arm’s-length customer, even where it sits in the same general ledger account. Deavo’s own red-flag list for reading financial statements names “loans to or from related parties, shareholders, or other companies the owner controls” as something to isolate specifically (deavo, reading financial statements), and the aging-report source above singles out related-party receivables for separate scrutiny from ordinary trade debt for the same reason: a shareholder is not going to send the business to collections over an unpaid balance the way a genuine customer might, so its age on the aging report says very little about whether it will ever actually be repaid.
The practical response is to strip related-party balances out of the trade-receivables collectibility analysis entirely and treat them as their own line item — either something the seller is expected to settle before closing, or a separate, explicitly negotiated term, rather than folding it into the same aging bands as genuine customer debt and letting it flatter the overall collectibility picture.
On an asset purchase specifically, it is common for the seller to retain the existing receivables and collect them directly after closing, rather than selling them to the buyer at all — the buyer starts fresh with the business’s ongoing customer relationships without inheriting collection risk on invoices billed before the change of ownership. Where that is the structure, the s. 22 election and the discounting exercise above do not apply in the same way, because no receivables are actually changing hands; the aging analysis still matters, but as diligence on how the business collects going forward rather than as a valuation exercise on assets being purchased.
To illustrate the mechanics only — the figures are a scenario, not a benchmark — a target reports $420,000 in accounts receivable. The aging breaks down as $260,000 current or within 30 days, $90,000 at 31–60 days, $40,000 at 61–90 days, and $30,000 over 90 days. Cross-checking the aging against twelve months of bank deposits shows the current and 30-day bands collecting reliably, but three of the over-90 accounts show no deposits matching their invoiced amounts at all over the same period.
A further $22,000 inside the current band turns out, on closer review, to be an outstanding loan from the corporation to the owner personally, recorded in the same receivables account as trade debt. The buyer removes that balance from the collectibility analysis entirely and treats it as a pre-closing matter between the seller and the corporation. On the remaining trade receivables, the buyer and seller agree a s. 22 joint election, valuing them at $385,000 rather than the $398,000 trade-only face value — a discount concentrated in the over-90 band — with the seller retaining the right to collect the discounted-out balance directly after closing.
Related: aged payables and stretched supplier terms, building a cash conversion picture of the business, checking whether the customer list is real, a related case file on a receivable ledger propped up by one debtor.
Only where the debt was included in computing income in the current or a prior taxation year, per ITA s. 20(1)(p) — whether that condition is met after a business sale depends on the specific deal structure and any s. 22 election made, and should be confirmed with an accountant.
Yes — it is a joint election, and the parties agreeing on the receivables’ actual value is the mechanism itself, not a formality layered on top of an already-agreed number.
Cross-check a sample of invoices marked collected against actual bank deposits over the same period — a technique that needs no customer contact and quickly surfaces whether the report reflects reality.
No — it should be isolated and assessed separately, since a related party is unlikely to be pursued for collection the same way an arm’s-length customer would be, and its age on the report says little about whether it will actually be repaid.
A short call is enough to walk through the bands, the s. 22 election and what to discount.
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