A write off is a reduction in the recorded amount of an asset. A write off occurs upon the realization that an asset no longer can be converted into cash, can provide no further use to a business, or has no market value.
For example, a write off is mandated when an account receivable cannot be collected, when inventory is obsolete, when there is no longer any use for a fixed asset, or when an employee leaves the company and is not willing to pay the company back for a pay advance.
In general, a write off is accomplished by shifting some or all of the balance in an asset account to an expense account. The accounting can vary, depending on the asset involved. For example:
- When an account receivable cannot be collected, it is usually offset against the allowance for doubtful accounts (a contra account).
- When inventory is obsolete, it can either be charged directly to the cost of goods sold or offset against the reserve for obsolete inventory (a contra account).
- 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.
- When a pay advance cannot be collected, it is charged to compensation expense.
When 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 write off usually occurs at once, rather than being spread over several periods, since it is usually triggered by a single event that should be recognized immediately.
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.
Management sometimes accelerates the use of write downs and write offs in order to recognize expenses and thereby reduce the amount of taxable income. When taken to an extreme, this can result in fraudulent financial statements.