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A write-off is a reduction of the recognized value of something. In
accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
, this is a recognition of the reduced or zero value of an asset. In
income tax An income tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelate ...
statements, this is a reduction of taxable income, as a recognition of certain expenses required to produce the income.


Income tax

In
income tax An income tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelate ...
calculation, a write-off is the
itemized deduction Under United States tax law, itemized deductions are eligible expenses that individual taxpayers can claim on federal income Tax return (United States), tax returns and which decrease their taxable income, and is claimable in place of a standard ded ...
of an item's value from a person's taxable income. Thus, if a person in the United States has a taxable income of $50,000 per year, a $100 telephone for business use would lower the taxable income to $49,900. If that person is in a 25%
tax bracket Tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, though that is rarer). Essentially, tax brackets are the cutoff values for taxable income—income past a certain point ...
, the tax due would be lowered by $25. Thus the net cost of the telephone is $75 instead of $100. In order for business owners to write-off business expenses, the IRS states that purchases must be both ordinary and necessary. This means that deductible items must be usual and required for the business owner's field of work. For example, a telemarketer may deduct the purchase of a phone since phones are used normally and necessarily in their work.


Accounting

In business accounting, the term write-off is used to refer to an investment (such as a purchase of sellable goods) for which a return on the investment is now impossible or unlikely. The item's potential return is thus canceled and removed from ("written off") the business's
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
. Common write-offs in retail include spoiled and damaged goods. In commercial or industrial settings, a productive asset may be subject to write-off if it suffers failure or accident damage that is infeasible to repair, leaving the asset unusable for its intended purpose.


Banking

Similarly, banks write off
bad debt Bad debt occasionally called Uncollectible accounts expense is a monetary amount Quantity or amount is a property that can exist as a multitude Multitude is a term for a group of people who cannot be classed under any other distinct category, ...
that is declared non collectable (such as a loan on a defunct business, or a credit card due that is in default), removing it from their balance sheets. A reduction in the value of an asset or earnings by the amount of an expense or loss. Companies are able to write off certain expenses that are required to run the business, or have been incurred in the operation of the business and detract from retained revenues.


Negative write-offs

A negative write-off refers to the decision not to pay back an individual or organization that has overpaid on an account. Negative write-offs can sometimes be seen as fraudulent activity if those who overpay a claim or bill are not informed that they have overpaid and are not given any chance to reconcile their overpayment or be refunded. Some institutions such as banks, hospitals, universities, and other large organizations regularly perform negative write-offs, especially when the amount is considered low (e.g., $5 at some institutions or up to $15 or more at others).


Write-down

A write-down is an accounting treatment that recognizes the reduced value of an
impaired assetAn impaired asset is an asset which has a market value less than the value listed on its owner's balance sheet. According to U.S. accounting rules (known as Generally Accepted Accounting Principles (United States), US GAAP), the value of an asset is ...
. The value of an asset may change due to fundamental changes in technology or markets. One example is when one company purchases another and pays more than the net
fair value In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been call ...
of its
assets In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as ...
and
liabilities Liability may refer to: Law * Legal liability, in both civil and criminal law ** Public liability, part of the law of tort which focuses on civil wrongs ** Product liability, the area of law in which manufacturers, distributors, suppliers, re ...
. The excess purchase price is recorded on the buying company's accounts as goodwill. If it becomes apparent that the purchased asset no longer has the value recorded in the goodwill account (i.e., if the asset cannot be resold at the same price), the value in the goodwill asset account is "written down". One example is when
Rupert Murdoch Keith Rupert Murdoch ( ; born 11 March 1931) is an Australian-born American billionaire businessman, media tycoon, and investor. Through his company News Corp The current incarnation of News Corporation, stylized as News Corp, is an Am ...

Rupert Murdoch
's
News Corp The current incarnation of News Corporation, stylized as News Corp, is an American mass media and publishing company operating across digital real estate information, news media, book publishing, and cable television. It was formed in 2013 as ...
bought ''
Wall Street Journal ''The Wall Street Journal'', also known as ''The Journal'', is an American business-focused, English-language international daily newspaper A newspaper is a periodical Periodical literature (also called a periodical publication or simpl ...

Wall Street Journal
'' publisher Dow Jones at a 60% premium in 2007, which News Corp. later had to write down by $2.8 billion because of declining advertising revenues. A write-down is sometimes considered synonymous with a write-off. The distinction is that while a write-off is generally completely removed from the
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
, a write-down leaves the asset with a lower value. As an example, one of the consequences of the 2007 subprime crisis for
financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entit ...
s was a revaluation under
mark-to-market Mark-to-market (MTM or M2M) or fair value accounting refers to accounting for the "fair value In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about econo ...
rules: "Washington Mutual will write down by $150 million the value of $17 billion in loans".


See also

*
Amortization Amortization (or amortisation; ) is paying off an amount owed over time by making planned, incremental payments of principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academ ...
*
Charge-off A charge-off or chargeoff is a declaration by a creditor (usually a credit card account) that an amount of debt is unlikely to be collected. This occurs when a consumer becomes severely delinquent on a debt. Traditionally, creditors make this declar ...
* Depletion *
Depreciation In accountancy, depreciation refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the allocation in a ...

Depreciation
*
Revaluation of fixed assets In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available ...


References


External links


Small Dollar Balance Policy at Purdue University

Alachua County Policy on Removal of Uncollectible Accounts from the Financial Statements (Amended)


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