Let's say there's an S Corporation with a single shareholder, a $200 balance in "Loans to Shareholders", and a $300 balance in Retained Earnings. Is it okay to cancel the shareholder's debt by canceling against the shareholder's equity, by crediting $200 to Loans to Shareholders and debiting $200 to Retained Earnings?

UPDATE: I'm not allowed to add an official Comment to the answer, so I'm clarifying here.

(1) I never suggested "writing off" a loan, I suggested CHARGING it against Retained Earnings, an entirely different concept.

(2) As I mentioned, this is an S Corporation. Profits that make it into Retained Earnings have already been taxed. There are no tax issues from the bookkeeping entry I'm suggesting.

(3) I never suggested the S corp. not paying back creditors, and actually never mentioned creditors.

So, the answer doesn't address my question.


Loans to shareholders are loans and have to be repaid. If the loan is written off then it becomes salary or dividend and must be taxed, not doing so would be tax avoidance. If the company goes bankrupt, shareholder loans must be paid back and distributed to creditors, not doing so is fraud.

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I found the answer elsewhere: Instead of debiting Retained Earnings directly, I debit Distributions, and then at the end of the period, close Distributions to Retained Earnings.

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