The difference between the two is a matter of degree; otherwise, they are similar concepts. In accounting, a write-down is performed to reduce the value of an asset to offset a loss or expense. A write-down becomes a write-off if the entire balance of the asset is eliminated and removed from the books altogether.

Write-downs are predominantly performed by businesses. Write-offs are common among both businesses and individuals; the latter perform write-offs to reduce their personal taxable income (What is the difference between a write-off and a deduction?).

Accounting for a Write-Down

A write-down is recorded as an adjustment to existing inventory. This means a credit is applied to the equipment (or whatever the inventory item is) and the total value is reduced accordingly. If the write-down itself is small, it can be reported instead as a cost of goods sold (COGS). Otherwise, it is required to be listed as a line item on the income statement, thus allowing lenders and investors the chance to consider the impact of devalued assets. An under-reported fact: Large write-downs actually reduce owners' or stockholders' equity.

Accounting for a Write-Off

Writing off an asset is the same as claiming the asset no longer serves a purpose and has no future value. Old equipment can be written off even if it still has some potential functionality. For example, a company might upgrade its machines or purchase brand-new computers. In these circumstances, the equipment being replaced can be written off and have its economic values listed at $0.00.

If an individual or business cannot recoup a debt, such as a receivable that's no longer likely to be collected, or if an inventory item will not sell, those items can be taken off the books. It is recognized on either the income statement or the balance sheet, depending on the type of write-off.

For example, it's possible to have a bad debt write-off, in which a customer who has purchased a product or service on credit is deemed to default and not pay. The accounts receivable on the company's balance sheet is written off by the amount of the bad debt, which effectively reduces the accounts receivable balance by the amount of the write-off.

If the company uses accrual accounting practices, an adjustment to revenue must be made on the income statement to reflect the fact that the revenue once thought to be earned will now not be collected.

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Write-Down

Negative Write-Offs

A negative write-off is essentially the opposite of a normal write-off in that it refers to a business decision to not pay back or settle the account of a person or organization that has overpaid.

Using the scenario above, if a customer pays full price for a product on credit terms, and then after the payment is made, the same customer was given a discount, it's up to the company to credit back the amount of the discount to the consumer. If the company decides not to do this and keeps the overpayment, it's considered to be a negative write-off.

Negative write-offs can harm relationships with consumers and may also cause negative legal implications.