What is a 'Charge-Off'

A charge-off is an expense on a company's income statement that is either related to a debt that is deemed uncollectible by the reporting firm and is subsequently written off of the balance sheet, or a probable one-time extraordinary expense incurred by a company that negatively affects earnings and results in a write-down of some of the firm's assets. The write-down arises due to impairments of assets.

BREAKING DOWN 'Charge-Off'

Bad debt expenses arise when a firm is unable to collect on some of its accounts receivable (AR). When this occurs, the firm has little recourse; it could either sell the probable bad debt to a collection agency (a sale will be recorded on the firm's books, but not as an expense), or it could just write off the uncollectible amount as an expense on the income statement.

For a debt to qualify as a business bad debt, it must be incurred as part of normal business operations. The debt can be associated with either another business or an individual. Bad debt charge-offs are more likely to occur when associated with unsecured forms of credit, such as credit card debts or signature loans.

One Time Expense Charge-Offs

If a company is willing to take a one-time charge against a particular accounting period, referred to as a charge-off, this likely means that an extraordinary event has occurred and, although it affects present earnings, it is unlikely to occur again in the foreseeable future. As a result, a company will usually provide an earnings per share (EPS) figure with and without this charge to help demonstrate to stakeholders the irregular nature of the expense. A charge such as this may also be referred to as a one-off, meaning that it is likely to only occur in this instance.

A charge-off of this nature can include the purchase of a large asset, such as a new facility or large piece of equipment, that is unlikely to be replaced for some time. It can also include charges related to an uncommon event, such as repairs required after a fire that the company has been deemed responsible for paying or the payment of insurance deductibles for covered damages caused by a natural disaster.

Certain irregular maintenance expenses could also qualify, such as a roof replacement. Even though the need for such maintenance may be somewhat predictable, the precise timing and nature of the charge is often unknown. Further, this form of maintenance may only be required once every 20 or more years.

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