Accounts Written Off
It refers to asset accounts such as trade receivables which are deemed to be unrecoverable or worthless and therefore are removed from the entity’s general ledger.
Understanding Write Off
Business entities often use accounting write-offs to take into account losses on assets that arise due to various situations. A write-off entry usually involves a debit to a write-off expenditure account appearing on the statement of profit or loss and a credit to the related asset account appearing on the statement of financial position. The circumstances leading up to write-offs will differ but still the write-off expenses will get reported on the statement of profit or loss and will be deducted from any reported revenue.
The methods that are commonly used by business entities for accounting write-offs especially in the case of receivables include the allowance method and direct write-off method. The journal entries for recording write-offs may differ depending on the circumstances that cause each write-off. The most common reasons behind an entity writing-off its assets include unpaid receivables, losses on inventory, and unpaid loans.
An entity may write-off some of its receivables after determining that they are not going to be recovered. The entry in case of a direct write-off method would involve a debit to bad debt expense account and credit to accounts receivable. The entry in case of the allowance method would involve a debit to bad debts expense account and a credit to allowance for doubtful debts account.
There can be many reasons as to why a business entity may write-off the value of a portion of its stock/ inventory. Stock can be spoiled, stolen, lost, or become obsolete. The entry for writing-off stock usually involves a debit to an expense account for unusable inventory and a credit to the inventory account appearing on the face of the statement of financial position.
Financial institutions such as banks and insurance companies use write-off accounts only when they have used all other methods to collect their receivables/ loans from their customers. Write-offs can be tracked closely with the use of an institution’s loan loss reserves, which is a non-cash account that manages expectations for losses on debts that are still outstanding. Loan loss reserves work like a projection for unpaid debt balances while write-offs represent the final action an entity can take against outstanding debt balances.
Difference between a Write-off and a Write-down
A variation on the concept of write off is a write-down, where a portion of an asset’s value is charged to the statement of profit or loss, leaving a reduced value of the asset on the entity’s books. For example, a settlement with a customer having an outstanding balance may lead to a 50% reduction in the amount of the invoice the customer was to pay originally. The above example represents a write down on half of the amount of the original invoice that was issued to the customer.