A write-off is when the value of an asset is reduced and simultaneously debiting the liabilities account. The primary use is by businesses accounting for unpaid loans, unpaid receivables, or losses on stored inventory. Write-offs can also help lower a tax bill.
Businesses use accounting write-offs to record losses on assets. The reasons for the losses vary. Showing a write-off on the balance sheet means that an expense account is debited and the associated asset account is credited. These are also reported on the income statement so revenues already reported are properly deducted.
The entries required for a write-off are set by the Generally Accepted Accounting Principles (GAAP). Two common write-off methods are the direct write-off method and the allowance method. Three of the most common reasons for business write-offs are unpaid bank loans, unpaid receivables, and losses on stored inventory.
Examples of Write-offs
Say a supermarket has produce that is starting to go bad by the end of the week. An employee notices the spoiled fruit and throws it out. This is a routine done every week to make sure the product is still good when being sold. The unsold produce is an inventory write-off because it went bad before being sold.
A small beekeeping company owner uses his personal truck to haul bees, haul equipment to and from bee yards, and access the yards to work the bees. The truck payments, miles on the truck, maintenance on the truck, the gasoline would all be a business expense write-off.
Recently there have been reports of container ships losing containers over the side. Now, these shipping companies cannot necessarily write-off the container if they did not own it. However, the company that owned the items inside the container can write-off that inventory because there is no way they are going to get it back.
Types of Write-Offs
Banks will write-off loans when they have used up all the options to collect the money back. These write-offs will be closely tracked by the load loss reserves which work as a projection for unpaid debts.
Businesses will write-off things after realizing the customer is not going to pay their bill. This involves debiting a liability to an unpaid receivables account and crediting the accounts receivable. Inventory can always be lost, stolen, ruined in some manner, or become obsolete before it is sold. Writing-off inventory is recorded by recording an expense debit for the value of unusable inventory and then crediting the inventory account.
Write-offs can also apply loosely to taxes. Deductions, credits, and expenses that can reduce the taxable income can be called write-offs. Businesses and individuals can claim deductions that will reduce their taxable income. The Internal Revenue Service has a standard deduction on income tax returns, however, some choose to itemize each deduction because the total amount exceeds the standard. Tax credits are another type of tax write-off. Tax credits are applied to the taxes owed thus lowering the overall tax bill.
Corporations and small businesses take report expense write-offs that reduce the profits and therefore the taxable income.