It stands for net charge-off; the difference between the amount of gross charge-offs (GCO), or simply charge-offs, and any recoveries of a delinquent debt. The net charge-offs indicate the probability that the debt will not be repaid by a debtor. However, it does not mean that the debt has been written off (actually, the debtor still owes the debt, and the creditor is still able to attempt collection). Charge-offs initially involve the removal of a percentage of a delinquent debt from a creditor’s books as an asset. The situation may develop, if no collection takes place, into a write-off. In this sense, charge-offs are a type of write-off. The result is an expense to be charged to the creditor’s income.
The net charge-offs (NCO) are the monetary amount representing the difference between gross charge-offs and any recoveries of a delinquent debt that may take place later on. Net charge-offs refer to the debt owed to an entity that is unlikely to be recovered as of the time of reporting:
Net charge-off = gross charge-off – amount recovered
For example, if the gross charge-off is CU 20,000, while the creditor has managed to recover CU 6,000, then the net charge-off:
Net charge-off = 20,000 – 6,000 = CU 14,000
This is the net amount that the creditor entity declares as irrecoverable or uncollectible bad debt.
