Reviewed by Oct 05, 2020| Updated on
In accounting terminology, a write-off refers to reducing the value of an asset while debiting a liabilities account. Literally, the term is used by businesses that are seeking to account for unpaid loan obligations, unpaid receivables, or losses on stored inventory. From another perspective, write-offs help lower the annual tax liability of the business.
Businesses use accounting write-offs to keep track of losses on assets. In a balance sheet, write-offs include a credit to the associated asset account and a debit to an expense account. Expenses will also be entered in the income statement after deducting from the revenues already reported.
The general scenarios for business write-offs include unpaid bank loans, losses on stored inventory, and unpaid receivables. Here is a detailed description of each of these cases:
Unpaid Bank Loans: Banks and other financial institutions use the write-off method when all the collection methods are exhausted. A bank's loan loss reserves, a non-cash account that manages expectations for losses and unpaid loans, can give a deep insight into the write-offs. While loan loss reserves project unpaid loans, write-offs work as the final action taken on them.
Stored Inventory Losses: A company may have to write-off some of its inventory for several reasons, such as stolen, lost, spoiled, or obsolete. Writing off inventory on a balance sheet involves an expense debit for the value of unusable inventory and a credit to inventory.
Unpaid Receivables: When a business is convinced that a customer is not going to pay the bill, the business may have to write it off. On the balance sheet, the debit to an unpaid receivables account may have to be marked as a liability and a credit to accounts receivable.