Final answer:
To categorize accounts receivable by age, you perform the aging of accounts receivable and then assign an allowance for doubtful accounts. This categorization and allowance help in estimating potentially uncollectible debts and enhances financial management.
Step-by-step explanation:
When you put accounts receivable into categories by age, you are performing a process known as aging of accounts receivable. This process involves grouping all outstanding invoices or credit sales by the length of time they have been unpaid. The typical categories are current (0-30 days), 31-60 days, 61-90 days, and over 90 days. After categorizing, you would then assign an allowance for doubtful accounts, which is an estimate of the amount of receivables that may not be collectible.
The aging of accounts receivable helps businesses identify which debts are overdue and estimate the risk of bad debts, thereby allowing for better financial management and planning. It's an essential aspect of a company's credit and collections policies, impacting the business's cash flow and profitability.