Debitoor Dictionary

Accounting terms explained in a simple way

Over 150 Articles for Founders and Entrepreneurs

  1. Accounts receivable
  2. Amortisation
  3. Contra account
  4. Depreciation
  5. Impairment
  6. Liquidation
  7. Market value

Write-off - What is a write-off?

A write-off is when the recorded value of an asset is reduced to zero. A write-off may occur when an asset can no longer be liquidised, has no further use for the business, or no longer has market value.

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Assets can lose value for a number of different reasons. For example, inventory can become spoiled or damaged and therefore unsuitable for sale, whilst equipment and machinery may become worthless if it can no longer be used for its intended purpose due to failure or irreparable damage. Another common example is when an employee is paid in advance, but then leaves the company before paying back the advance.

How to record write-offs in accounting

As a general rule, a write-off is achieved by shifting the balance in an asset account over to an expense account. However the exact process can vary, depending on the asset involved. For example:

  • If your business no longer has use for a fixed asset, it should be offset against all accumulated depreciation or amortisation, with the remaining amount being charged to a loss account.
  • If you pay an employee in advance, but they leave the company before you are able to collect the advance, this should be charged as a compensation expense.
  • If it is not possible to collect an account receivable, it should be offset against a contra account.

Write-off vs. write-down

A write-down is a similar concept to a write-off. However, a write-down reduces the value of an asset to less than its original value to offset an expense or a loss, whereas a write-off reduces the balance of the asset to zero, therefore eliminating the value entirely.

A write-down may occur due to impairment, damage, poor management, or advances in technology.