What does it mean to ‘write off’ a bad debt?

Writing off a bad debt refers to the accounting process of removing an uncollectible account from a company's financial records. This typically happens when a business has determined that a debtor is unlikely to pay the amount owed. By writing off the debt, the company acknowledges that this particular debt is no longer considered an asset, as it will not bring any future economic benefit.

When a debt is written off, it is not just a temporary measure; rather, it involves a formal adjustment to the accounting records and typically affects both the balance sheet and the income statement. The accounts receivable balance decreases by the amount of the written-off debt, and an expense is recognized, reflecting the loss. This process helps maintain accurate financial statements and gives stakeholders a clearer picture of a company's financial health.

In contrast, the other options describe actions that do not properly represent the concept of writing off a bad debt. Temporarily stopping collections does not change the validity of the debt, extending payment terms does not eliminate the obligation to pay, and increasing the debt amount is contrary to the purpose of writing it off. Thus, understanding what it means to write off a bad debt is crucial for accounting and financial reporting purposes.