What is a ‘write-off’ in accounts receivable?

A 'write-off' in accounts receivable refers to the formal acknowledgment that a specific account balance is deemed uncollectible. This typically occurs after a company has exhausted all reasonable efforts to collect the receivable, such as sending reminders or negotiating payment arrangements, and determined that the likelihood of recovering that amount is very low or nonexistent. By writing off the account, the company adjusts its financial records to accurately reflect its expected cash flow, ultimately helping to present a clearer financial picture.

Writing off an account does not mean that the company is giving up entirely on collection efforts; rather, it is a necessary accounting practice to ensure that the balance sheet is free from inflating assets with amounts that are not realistically collectible. This process provides a more accurate reporting of the company’s financial health and aligns with accounting principles that emphasize true and fair representation of assets.