Final answer:
A write-off reduces the net receivable balance on the balance sheet and records an expense on the income statement, which decreases net income. It accurately reflects expected cash inflow changes and adjusts the net worth or bank capital.
Step-by-step explanation:
When a company writes off a receivable, it affects both the income statement and the balance sheet. On the income statement, the write-off is recorded as an expense, typically under a line item called 'bad debt expense' or 'uncollectible accounts expense,' which will reduce the company's net income for that period. On the balance sheet, the net receivable balance is decreased by the amount of the write-off in the accounts receivable (under current assets), reflecting that the expected cash inflow from the receivable will no longer occur.
The process of writing off a receivable is part of ensuring that the balance sheet accurately reflects the assets that are likely to be converted into cash. This action follows the accounting principle of conservatism whereby businesses must report any potential losses immediately. The act of writing off bad debt ultimately adjusts the net worth or bank capital on a bank's balance sheet.