What is a Charge Off?

Published by Thomas Herold in Corporate Finance, Economics, Laws & Regulations

'Charge Off' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A charge off refers to an expense item found on a corporation’s income statement. This could be one of two things. It might be connected with a debt that the reporting firm has decided is not realistically collectable. They would then write this off from the corporate balance sheet. It might also be a likely one time only expense which is called an extraordinary event. The company incurs this, and it impacts the earnings negatively. This then leads to a portion of the corporate assets’ becoming written down in value. Because the assets have become impaired, the write down occurs.

Where bad debt costs crop up, this is related to a company not being able to collects bills owed for at least a portion of its accounts receivable, also called AR. These events unfortunately happen sometimes, and firms can do little about them. They might attempt to sell off the likely bad debts to an interested collection agency. The company would then record a sale on the books, yet it would not be marked down as an expense item. Otherwise, they might simply charge off the amount which is uncollectable on the income statement by calling it an expense.

In order for debts to be considered to be bad debts, they have to be run up in the typical operations of the business. Such a debt could be incurred by either a person or another company. These charge offs for the bad debts more typically happen as companies extend credit (to other entities) that is unsecured. Examples of this would be signature-only loans or credit cards.

One time expenses which are charged off are another story altogether. Sometimes a firm will consent to an extraordinary charge off in a given period of accounting. This would impact the current period earnings, yet they feel it will not likely happen again in the near future. The end result is ultimately that the company will commonly offer its EPS earnings per share numbers both without and with the charge off in question reflected. This allows them to show the company shareholders that the expense is unusual and uncommon. They might also call this a one off charge.

Such charge offs could involve the buying of a major asset. This could be a significant piece of equipment or a brand new production facility. These expenses would not be repeated too often. There might also be charges that are associated with an unusual event. Examples of this are paying deductibles for insured items that became damaged in a natural disaster. There could also be a flood or a fire for which the firm has to pay the costs to cover the damage.

There might also be maintenance types of expenses that are not normal. These might include replacing a roof. It is true that maintenance issues like these can be predicted to a degree. Because the exact date of service and amount of charge can not easily be quantified. Since such maintenance issues are only necessary every few decades, they are extraordinary items indeed.
Charge offs could also pertain to individuals who have seen one of their personal debts charged off. Such an event does not mean that a creditor has specifically cancelled the debt. Borrowers will still have to pay off the balance in theory. When credit card payments become late, they go into late payment status. After a payment is 180 days late, the creditor companies will at last charge off the debt. They might then send it out for collection agencies or file lawsuits if the laws of the state where the debtor resides allow.

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The term 'Charge Off' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.