Write-Off

Updated on January 3, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Write-Off Meaning

A write-off removes an asset or liability from a company’s financial statements. Assets are written off when they become obsolete. Lost inventory, unpaid debt obligation, bad debts, and unpaid receivables are also written off.

It is achieved by moving a part of or all of the asset account balance into an expense account. Writing-off is used for reducing tax liabilities. These expenses curtail the company’s taxable income and decrease the book value of the assets.

Key Takeaways

  • A write-off reduces the value of assets in a company’s book of accounts. This technique improves cost accounting accuracy. It even helps the company represent a fair asset and liability position—financial statements.
  • The recorded book value of an asset is reduced to zero. Usually, this occurs when assets owned by a business cannot be liquidated. They have no further use to the business or have no market value.
  • In retail companies, common write-offs comprise damaged goods. In industrial companies, productive assets get damaged beyond repair—such assets are written-off.

How Does a Write-Off in Accounting Work?

Write-off

Businesses often write-off expenses and non-performing assets—to unload irrelevant elements from balance sheets. Writing off improves the accuracy of cost accounting. It is a technique used for reducing tax liabilities. Businesses create non-cash expenses, as they ultimately end up lowering reported income.

Hence, it can be defined as the process of removing an asset or liabilityLiabilityLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read more from the accounting books and financial statements. For example, this might happen when an inventory becomes obsolete or when there is no particular use for a fixed asset. Usually, this is achieved by moving a part of the balance or all of the asset account balance into an expense account. The procedure varies for different asset types.

Companies decrease the book value of the assets for depreciation, loss, theft, fire, and obsoletion. Non-performing assets do not generate revenue. But they are still considered so that a real-time balance sheet can be maintained—containing fair book values of assets and liabilities. This way, the true position of an organization can be determined.

Examples

Following are examples of businesses writing off various assets and expenses:

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Accounting

The Generally Accepted Accounting Principles (GAAP) have stated the accounting procedure for writing off expenses and assets. Following are the two methods used for it:

Direct Write-Off Method: The company’s non-recoverable outstanding accounts receivables are transferred straight to the bad debt account. The following entry is formulated:

ParticularsDebitCredit
Bad Debt A/c…                                                      Dr    xxx 
To Accounts Receivables A/cxxx

Allowance Method: Just like reserves, every company maintains an allowance for doubtful accounts and uses it to adjust bad debts. The following accounting entry is formulated:

ParticularsDebitCredit
Allowance for Doubtful A/c…                             Dr    xxx 
To Accounts Receivables A/cxxx

Write-Off Vs. Write Down

Writing-off brings down the value of an asset to zero. A write-down, on the other hand, reduces the book value of an asset when its carrying value exceeds fair value (carrying value = purchase price – accumulated depreciation). The impaired amount is shown as a separate item in the income statement.

Both concepts account for the loss of assets, but the difference is in the degree of reduction. Written-off, assets completely lose their value. But, with write-downs, only a partial value of the asset is lost.

Frequently Asked Questions (FAQs)

Can you write off stock losses?

A trader can write-off short-term stock losses against short-term gains. However, long-term equity losses cannot be written-off. 

What business expense can I write-off?

The following expenses can be written-off: business, insurance, depreciation, advance pay, charity contribution, medical expense, advertisements, promotion, mortgage expenses, professional service fees, and interest on loans.  

What happens when a loan is written off?

Every bank maintains a provision for bad debts—the loan loss reserve. Unrecovered loan amounts are adjusted using the reserves—dead assets are eliminated from the balance sheet. Bank loans are considered revenue-generating assets.

Write-Offs Video

This article has been a guide to what is a Write-Off and its meaning. Here we discuss the writing-off of bad debts, car loans, student loans, business expenses, and taxes from journal entries and accounting. You may learn more about accounting from the following articles –

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