What Is a Write-Off?

When a business has unreceived payments, unpaid loans, or lost inventory, it creates an accounting entry known as a write-off to record these losses. A write-off reduces taxable income on a company's income statement.

Accounting Entries

Businesses use accounting write-offs to account for losses. 澳洲幸运5官方开奖结果体彩网:Generally Accepted 𒉰Accounting Principles (GAAP) detail the accounting entries required for a write-off. Two standard business accounting methods for write-offs include the direct write-off method and the allo🐬wance method.

Under the direct write-off method, bad debts are expensed. The company credits the accounts receivable account on the balance sheet and debits the bad debt expense account on the income statement. Under the 澳洲幸运5官方开奖结果体彩网:allowance method, an uncollectible customer’s debt is written off by removing the amount from accounts receivable. The entries account for scenarios such as:

• Bank Loans: Financial institutions use write-off accounts when they have exhausted all methods of collection action on loans. Write-offs are tracked alongside an institution’s loan loss reserves, a non-cash account that manages expectations for losses on unpaid debts. Loan loss reserves project unpaid debts, while write-offs are the final action.
• Receivables: A business may incur a write-off after a customer defaults on a bill. This will include a debit to an unpaid receivables account as a liability and a credit to accounts receivable on a company's balance sheet.
• Inventory: Write-offs are used to account for inventory that is lost, stolen, spoiled, or obsolete. An expense debit for the value of unusable inventory and a credit action to inventory are noted on the balance sheet. 

Tax Credits and Deductions

The term write-off loosely explains an action that reduces taxable income. Deductions, credits, and expenses overall may be referre🌌d to aꦗs write-offs. Businesses and individuals claim certain deductions that reduce t🐻heir taxable income.

The Internal Revenue Service allows individuals to claim a 澳洲幸运5官方开奖结果体彩网:standard deduction on their income tax returns or 澳洲幸运5官方开奖结果体彩网:itemize deductions if they exceed the standard deduction level. Deductions reduce the 澳洲幸运5官方开奖结果体彩网:adjusted gross income applied to a corresponding tax rate. Tax credits apply to taxes owed, lowering the overall tax bill directly.

Write-Offs vs. Write-Downs

A write-down is where the book value of an asset is reduced below its 澳洲幸运5官方开奖结果体彩网:fair market value. For example, damaged equipment may be written down to a🍨 low🎶er value if it is still partially usable, and debt may be written down if the borrower repays a portion of the loan value.

The 澳洲幸运5官方开奖结果🐓体彩网:difference between a write-off and a write-down is a matter of degree. Where a write-down is a partial reducti🌳on of an asset's book value, a write-off indicates that an asset no longer produces or adds to income.

The Bottom Line

Understanding write-offs—and the difference between a tax write-off and a write-down can help reduce taxable income and increase the accuracy of a company's financial situation.