Write-Off: The process of removing a bad debt from a company's accounts receivable balance.
Write-off is the process of removing a bad debt from a company's accounts receivable balance. A bad debt is an account receivable that has been outstanding for a long time and is unlikely to be paid by the customer. In other words, it is a debt that the company considers to be uncollectible.
To write off a bad debt, the company must make an adjusting entry in its accounting records to remove the unpaid balance from its accounts receivable balance. The company will also remove the amount of the bad debt from its income statement and record it as an expense on the income statement. The write-off process is necessary to accurately reflect the true financial position of the company, as accounts receivable represent potential cash flow that the company may not actually receive.
In some cases, a company may be able to recover a portion of a bad debt, and in these cases, the company will record the recovery as income in its financial statements. However, recovery of a bad debt is usually rare, and the write-off process is typically a permanent removal of the debt from the company's financial records.
It is important for companies to have a clear policy on how to handle bad debts and when to write them off. The policy should be consistent with accounting principles and should ensure that the company's financial statements accurately reflect the value of its accounts receivable. Proper management of bad debts and write-offs is critical for a company's financial stability, cash flow, and profitability.