What Exactly Is A Write-Off
Hello All,
There is a highly amusing discussion from Schitt’s Creek about write-offs which is probably not too far off from most people’s understanding of the term.
To non accountants, a write off is something that simply reduces your tax bill. If you were to tell a business owner that having a meal with a client was a write off, they would immediately understand you.
The problem is that this usage of write off, which has now entered into common parlance (not unlike decimate or literally), is not technically correct. A write off, in technical terms is not the same as a deduction or an expense. Rather it specifically relates to an asset that no longer has value or has an impairment in value.
A common example of a write off would be inventory that has become obsolete. Although, it is recorded on your books at the price at which it was purchased with the intention of selling it for a profit, at a certain point it might be deemed to be too out of date to have any value. You would then write this off. Similarly, you might have a bad debt i.e. amount owing from a customer who has gone out of business and you have no choice but to write it off.
The accounting journal entry for a write off would be to:
Debit: Expense such as bad debt or inventory obsolescence
Credit: Asset such as Accounts Receivable or Inventory
From a tax perspective, a write off usually has the same treatment as a deduction or an expense in that it can reduce your taxes payable although there has to be strong evidence of the asset impairment in order to claim it.
Alternatively, if there is a good chance that an asset, such as investment, has lost value but might recover, you might simply set up a reserve or provision. This would not be deductible for tax purposes until you have more certainty at which point you would reverse the reserve and show it as a loss.
The accounting journal entry for a provision for a writeoff/loss/bad debt would be to:
Debit: Expense such as bad debt or inventory obsolescence (same as above)
Credit: Provision or Loss Reserve, which is a negative asset account (usually a sub account of the asset that you are writing off)
So, the next time someone mentions that they are going to write off their business trip to Italy, you can correct them and tell them that this is in fact an expense or a tax deduction. I’m sure this will make you very popular at parties :)
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Wishing everyone a lovely midsummer weekend! (and if watch the movie “MidSommar” if you want to see something truly disturbing)
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