Business, Legal & Accounting Glossary
In accounting, writing off is the expensing of a balance sheet asset that has no future benefits.
To charge an asset amount to expense or loss, in order to reduce the value of that asset and one’s earnings.
In accounting, writing off is the expensing of a balance sheet asset that has no future benefits.
An example would be the writing off of goodwill. The worthless asset will be recorded as an expense on the current period’s income statement rather than keeping it on the balance sheet as an asset.
Similar to a write off is a write-down. This is a partial write off. Only part of the value of the asset is removed from the balance sheet.
Writing off can be used to:
If you’re involved in an accident and your vehicle sustains damage, the insurer, if it believes it is liable, will payout. First, however, the insurer will want to satisfy itself that the claim is valid and also that it’s paying out the minimum sum it is bound to.
However, if substantial damage is done to a vehicle, a repair may not be economic. There is little point spending £1,000 repairing a vehicle, if it may then not be worth that amount. In such circumstances, the insurer will decide the vehicle is a ‘write off’ and either provide a replacement or cash payout to the policyholder.
In income tax calculation, a write-off is the itemized deduction of an item’s value from one’s taxable income. Thus if a person has a taxable income of $50,000 per year, a $100 telephone for business use would lower the taxable income to $49,900. If that person is in a 25% tax bracket, the tax due would be lowered from $12,500 to $12,475. Thus the net cost of the telephone is $75 instead of $100.
The phrase “writing off” is sometimes used in a way that suggests the item will be free. The value of the item is only deducted from taxable income, not from the tax itself. The term is also loosely used to refer to an item which is intended for personal use but which will be deducted (“written off”) as a business expense. Some individuals attempt to amass large numbers of “write-offs” in order to reach a lower tax bracket and increase the effective size of the deductions.
In business accounting, the term write-off is used to refer to an investment (such as a purchase of salable goods) for which a return on the investment is now impossible or unlikely. The item’s potential return is thus cancelled and removed from (“written off”) the business’s balance sheet. Common write-offs in retail include spoiled and damaged goods.
Similarly, banks write off bad debt that is declared uncollectable (such as a loan on a business that is now defunct), removing it from their balance sheets.
Many of the consequences of the subprime crisis at financial institutions are referred to as a “write-down”, which is synonymous with a write-off.
While a write-off in banking refers to a bad loan that is declared uncollectable, removing it from its balance sheet, a write-down, according to Investopedia, means:
Reducing the book value of an asset because it is overvalued compared to the market value.
So while a “write-off” removes the loan from the balance sheet, a “write-down” reduces the value of the loan in the balance sheet. Despite this difference, both terms indicate that the loaned money in question has no chance of being recovered.
The United States Government agreed to write off debts worth billions of dollars.
The Prime Minister persuaded the EU to write off the sectors debts.
Write-Down
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.
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 netbook value. This accounting write-off 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 per cent off. It’s written down 25 per cent.
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This glossary post was last updated: 28th December, 2021 | 0 Views.