What is a 'charge off' in financial terms?

A 'charge off' refers to accounts receivable that are deemed unlikely to be collected and are therefore written off as bad debt. This accounting action occurs when a company determines that the amount owed by a customer is no longer collectible, usually after extensive collection efforts. Recognizing a charge off helps the company reflect a more accurate financial condition by acknowledging that the expected cash inflow from these accounts will not materialize.

This process is important for maintaining transparency in financial reporting, as it allows businesses to adjust their accounting records to better reflect actual income and financial health. By charging off bad debts, companies can help ensure that their financial statements accurately portray their financial performance and position.