Write off definition
/What is a Write Off?
A write-off is the formal recognition that an asset no longer has value, resulting in its removal from a company's accounting records. It typically occurs when an asset becomes obsolete, damaged, uncollectible, or otherwise impaired. In financial reporting, a write-off reduces both the asset account and earnings, reflecting the true financial position of the business. Common examples include writing off bad debts, obsolete inventory, or impaired fixed assets. Although a write-off negatively impacts profitability, it ensures that financial statements are accurate and comply with accounting standards.
When Can You Record a Write Off?
You can record a write-off when there is clear evidence that an asset no longer has recoverable value or is impaired beyond reasonable use. This might happen if a customer defaults on a debt, making an account receivable uncollectible. It can also occur when inventory becomes obsolete, damaged, or expires, leaving it unsellable at any meaningful price. Fixed assets may be written off if they are destroyed, stolen, or rendered permanently unusable. In all cases, the write-off must be supported by documentation or analysis showing that recovery is no longer probable or feasible.
Types of Write Offs
There are several types of write offs that may be recognized in the accounting records, including the following:
Bad debt write-off. This occurs when a customer’s account is deemed uncollectible after all collection efforts fail, requiring removal from accounts receivable.
Inventory write-off. Happens when inventory becomes obsolete, damaged, expired, or otherwise unsellable, reducing inventory and recording a loss.
Asset impairment write-off. Used when the value of a fixed asset, like machinery or equipment, permanently declines below its book value, often due to damage or technological obsolescence.
Goodwill write-off. Occurs when goodwill (an intangible asset arising from acquisitions) loses value due to poor performance or market conditions, leading to an impairment loss.
Prepaid expense write-off. Involves writing off prepaid expenses that can no longer be utilized, such as a canceled insurance policy or non-refundable deposits.
Loan write-off. Banks and lenders use this when a borrower defaults and repayment is no longer expected, removing the loan asset from their books.
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Example of a Write Off
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.
Accounting for a Write Off
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. This reflects the conservatism principle in accounting, where losses are to be recognized as soon as possible.
The Difference Between a Write Off and a Write Down
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.