Definition: A write off is the transfer of some or all of the contents of an asset account into an expense account upon the realization that the asset no longer can be converted into cash, can provide no further use to the company, or has no market value.
For example, a write off is mandated when an account receivable cannot be collected, or when inventory is obsolete, or when there is no longer any use for a fixed asset.
The accounting for a write off varies, depending on the asset involved. For example:
- When an account receivable cannot be collected, it is usually offset against the allowance for doubtful accounts.
- When inventory is obsolete, it can either be charged directly to the cost of goods sold or offset against the reserve for obsolete inventory.
- When there is no longer any use for a fixed asset, it is offset against all related accumulated depreciation or accumulated amortization, with the remainder being charged to a loss account.
The general concept is to credit the asset account and debit an expense account. However, if an allowance account (contra account) is used, then the credit is to an allowance account. Later, when a specific write off is found, it is offset against the allowance account.
A variation on the write off concept is a write down, where part of the value of an asset is charged to expense, leaving a reduced asset still on the books. For example, a settlement with a customer might allow for a 50% reduction of the amount of an invoice that the customer will pay. This represents a write down on one-half of the amount of the original invoice.