What is meant by the term "write-off"?

The term "write-off" specifically refers to the process of removing an uncollectible account receivable from the books. This action occurs when a company determines that a specific account is unlikely to be collected, usually due to factors such as customer bankruptcy or prolonged delinquency. When an account is written off, it aids in presenting a more accurate picture of the company’s financial health, as it reflects only the amounts that are realistically expected to be collected.

This process does not eliminate the debt, as the account may still technically exist; it is simply recognized as a loss in the accounting records. The write-off also affects the balance sheet, as it reduces accounts receivable and may also impact the income statement by recognizing the expense related to bad debts. Understanding this concept is vital for accurate financial reporting and for assessing the company’s credit risk management proficiency.