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.