Write-Offs vs. Write-Downs: An Overview
The difference between a write-off and a write-down is just a matter of degree. A write-down is performed in accounting 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 and write-offs are predominantly performed by businesses. Taxpayers can also use "write-offs" to reduce their personal taxable income, but this isn't the same thing.
A write-down is recorded as an adjustment to existing inventory. A credit is applied to the equipment or whatever the inventory item is, and the total value is reduced accordingly.
A write-down can instead be reported as a cost of goods sold (COGS) if it's small. Otherwise, it must be listed as a line item on the income statement, affording lenders and investors an opportunity to consider the impact of devalued assets. Large write-downs actually reduce owners' or stockholders' equity.
Writing an asset off in business is the same as claiming that it no longer serves a purpose and has no future value. You're effectively telling the IRS that the value of the asset is now zero.
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. The equipment being replaced can be written off in this case. Its economic value would be listed at $0.
A bad debt write-off can occur when a customer who has purchased a product or service on credit is deemed to have defaulted and doesn't 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.
An adjustment to revenue must be made on the income statement to reflect the fact that the revenue once thought to be earned will not be collected if the company uses accrual accounting practices.
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.
It's up to the company to credit back the amount of a discount to the consumer when that customer pays full price for a product on credit terms, then is given a discount after payment is made. It's considered to be a negative write-off if the company decides not to do this and keeps the overpayment instead.
[Important: Negative write-offs can harm relationships with consumers and cause negative legal implications.]
Write-Off vs. Write-Down Example
Company X's warehouse, worth $500,000, is heavily damaged by fire, but it's still partially usable. Its value is written down by half to reflect the event. It's now worth $250,000.
Company X's warehouse burns to the ground. It can't be repaired or ever used again. It's $500,000 value is written off. Its value is now zero.
- A write-down reduces the value of an asset for tax and accounting purposes, but the asset still remains some value.
- A write-off negates all present and future value of an asset. It reduces its value to zero.
- A write-off is typically a one-time event, entered immediately when an asset has lost all usefulness or value, but write-downs can be entered incrementally over time.