The write-off is one of the most renowned accounting treatments, but most of us don’t know the exact cause of bringing things into this treatment.
If an asset has no worth, it should be written off. Consider on the off chance that a resource’s worth perseveringly reduces and is diminished to nothing; it will become futile to an association. In such conditions, associations write off such assets.
The write-off is often referred to as uncollectible accounts in a company’s accounts receivables. When it is determined that the receivable is no longer collectible, the company writes it off.
This article has elaborated on why and how write-offs occur and how their journal entries are made.
Merits and Demerits of Direct Write Off Technique
There are both advantages and disadvantages of the write-off method, i.e., when a company writes off its car, there will be its advantages and disadvantages.
What are the merits of Write off Technique/Procedure?
Write off technique is quite helpful in some situations. There are three core advantages of writing off an asset, and they are:
- In the write off method, a company deals with its unpaid debts. Therefore, the direct write off procedure is the easiest to go with among all other accounting methods used to calculate outstanding debts. The company only creates two transactions for the unpaid debts with flexible timings.
- Following the IRS, the companies also consider writing off their bad debt on annual tax returns. The write off technique is the only technique through which the IRS accepts bad debts. Otherwise, the IRS does not tolerate bad debts via any other accounting method like the allowance method because it does not use precise figures to represent a bad debt.
- The writing off technique prevents any errors from disturbing the financial reports because it is done based on actual amounts obtained from the invoices.
What are the Demerits of Write off Technique/Procedure?
Write off technique is not always as valuable as you may think. Like merits, there are three main disadvantages of writing off an asset, and they are:
- Writing off procedure does not follow the matching principle in accounting. The matching principle states that all expenses should be reported within the same period when they are incurred.
Irrecoverable expenses can not be determined at the time they are incurred with the write-off method. So at this moment, the write-off method does not match with the matching accounting principle.
- Write off methods may sometimes cause inaccuracy in the Financial Position Report. The mismatch due to not following the matching principle may cause several issues because of the reporting and incurring timings.
- Write off method also violates the Generally Accepted Accounting Principles (GAAP). This principle does not permit the use of the write off method because of the inaccuracies that occur due to mismatches. If financial statements are not accurate, then it might lead to unrealizable disruptions.
When is an asset written off?
When the asset is of no usage to an association, and its entire value becomes zero, it is written off by the company. These assets can then similarly be written off in the QuickBooks by restricting their value to nothing.
To help you understand writing properly, consider an example.
Consider a company that owns a car, and its value has depreciated to zero. So it has now decided to write off this car as it no longer has any worth. Let’s see how this company writes off its car.
How does a company write off its car?
Organizations routinely use write-offs to represent losses on their assets identified with different conditions. On the statement of financial position, write-offs generally include a debit to a business ledger and a credit to the concerned asset account.
There are different cases in which write-off treatment is done. However, the expenses are usually reported on the Statement Of Comprehensive Income (SOCI), deducted from any profit previously said. This prompts a lower profit and lower tax pay.
Take an Example:
Suppose an ABX Ltd. company uses a car for their official purposes. In January 2021, they realized that the car’s whole life was complete. So now the company wants to write off their car at its scrap value of $5,000. Below we’ve shown how the company ABC Ltd. wrote offs this car.
Journal Entry: Reducing the non-current asset account by increasing the write off an expense account
| Head of Account | Debit | Credit |
| Write off | $5,000 | |
| Car | $5,000 |
In this journal entry, ABC Ltd’s total assets on the financial position/balance sheet statement are diminished by $5,000. In correlation, the costs on the statement of comprehensive income expanded by a similar measure of $5,000 in January.
Explanation:
There are different types of write-offs that include spoiled, obsolete, and damaged inventory. In the above example, the car’s value was reduced as it became zero because it was out of date. This means the car becomes an obsolete inventory to the company. That’s why the company wrote it off.
The company will make accurate accounting entries that remove the car from the balance sheet and record a loss on its income statement.
Conclusion:
A company writes off its assets or inventory once it has zero value. This might be due to the broken or obsolete inventory. Only two journal entries are made to show the writing off a company’s assets.
Like everything in the accounting principle, the write-off method also has some benefits and disadvantages. These should be considered while writing off anything.
In this article, we’ve explained how, when, and why a company writes off its assets by showing an example of a company’s car.