Write-off (Assest write off, bad debt write off)
Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9. Copyright © 2012 by Marty J.Schmidt. Revised 12 March 2012.
The Meaning of Write-Off: Asset Write-Off, Bad Debt Write-Off
The term write-off (or write off) refers to an action in whereby the value of something is declared to be 0. Informally the term might be applied to a project, initiative, or program that is abandoned, or stopped because it is not expected to deliver results that were hoped for. Or write-off can refer to management's current view of an investment of any kind that is now regarded as worthless. More formally, however, write-off is an accounting term for declaring that certain kinds of assets now have 0 value: An asset that is written-off during an accounting period has its book value reduced or taken to 0. The loss may be charged as an expense.
Assets can become worthless for a variety of reasons. One of the most common uses for the write-off occurs when accounts receivable become uncollectable. Other kinds of asset losses may also be taken as tax deduction, depending on the country's tax laws, and depending on the nature of the asset and the nature of the loss.
• Bad Debt Write Off
• Other Kinds of Asset Write-Off
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Bad Debt Write Off
Sales transactions in business normally include payment timing provisions, such as "Net 30 from receipt of invoice" (meaning that payment is due no later than 30 days from invoice receipt). When a customer is late in paying, however, most companies continue to carry the obligation under "accounts receivable" for a period of time, using various means to encourage the customer to pay (see the encyclopedia entry bad debt).
Most companies, however, also have a specified cutoff period which may be something like 30, 60, 90, or 120 days, beyond which the company takes action in the form of (a) writing off the bad debt, as described below, and (b) referring the debt to a collection service or to their lawyers for further legal action. Note that writing off the debt by the accountants does not remove the customer's obligation to pay. Writing off the debt serves only to improve the company's accuracy in accounting.
The decision to write off a bad debt may also be taken when it becomes clear for other reasons that the customer is not going to pay, such as when the customer goes out of business, or comes under serious legal attack from other creditors, or simply challenges the legitimacy of the obligation.
The writing off of bad debts impacts the company's financial statements as follows:
- On the balance sheet, the bad debt write off enters the account "allowance for doubtful accounts" which is subtracted from the asset account "accounts receivable."
- On the income statement the bad debt expense normally appears along with other expenses under operating expenses, below the gross profit line.
- On the statement of changes in financial position (financial accounting cash flow statement), bad debt expense will be listed as a non cash expense, decreasing the total sales revenues cash contribution to net cash flow.
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Other Kinds of Asset Write Off
Other assets besides "accounts receivable" may also be written off, in some cases, when they become worthless or nonproductive. Writing off in these cases means reporting the loss as an expense charged against income on the income statement, which brings a tax savings.
The laws specifying the kinds of losses and kinds of assets that qualify for loss deduction, and the calculation of loss value, are given in the country's tax code. In the United States, for instance, this is Internal Revenue Code Section 65. (For a list of links to individual country tax authorities, worldwide, see www.solutionmatrix.com/tax.html )
Generally, the kinds of losses that qualify for writing off in this way— subject to many tax law conditions—include
- Ownership of stock shares that become worthless.
- Theft or vandalism.
- Casualty or catastrophe such as fire, flooding or other natural disaster.
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