What is a Write Off?

//What is a Write Off?
What is a Write Off? 2017-10-10T22:04:41+00:00

Definition: A write off is the process of removing an asset or liability from the accounting records and financial statements of a company. Companies tend to write off assets because the assets are no longer available or valid.

What Does Write Off Mean?

What is the definition of write off? Many people use this term when referring to income tax deductions, but the overall concept stays the same. A tax write-off is simply a recorded reduction in assets that is allowed to be taken as a deduction on a tax return. For instance, when a fixed asset is no longer useful and is discarded, the company removes it from its books and records a loss of the net book value. This accounting writeoff is also a deduction on the tax return.

Likewise, sometimes this concept is confused with write-downs. A write down is a reduction in the selling price of a good. This isn’t the reduction in an asset that is already on the books. You can think of this like something at the store that is 25 percent off. It’s written down 25 percent.

Let’s look at an example.

Example

The best example of a write-off is a bad debt. A bad debt is an account receivable that can no longer be collected. In other words, the company or customer that owes you money either refuses to pay or is unable to pay back the money it owes. Rather than keeping this bad receivable on the books, companies remove or writeoff the receivable. There are two main write-off methods: the direct writeoff method and the allowance method.

The inverse of this example is the customer or business that has its debt written off. Depending on the debt and the state, this customer may or may not legally owe the business still. If the debt has been forgiven, the customer can then write-off the liability on his books because the liability is not longer valid.

Another example of a writeoff is a building destroyed by a storm. The company will write-off or remove the building from the books and report a casualty loss from the storm. Sometimes companies will get reimbursements from insurance companies to offset the corresponding casualty loss. Either way, these assets are removed from the books because they are no longer in existence and no longer valid.

Summary Definition

Define Write-Off: Writeoff means the act of reducing an asset account balance in an accounting system to reflect the asset’s loss of value.