What is meant by Write-Off?
The process of write-off mostly refers to eliminating the assets—both current assets and non-current assets from the Financial Statements of the company.
The main reason as to why assets are written off from the Balance Sheet mostly revolves around the attempt to accurately depict the actual financial position of the company in terms of the assets it owns.
Hence, writing off an asset involves removing an asset, which is no longer foreseeable to derive economic value to the company in context.
It is rudimentary to understand that at any given point in time, financial assets declared on the Balance Sheet of the company should include assets that fully comply with the Asset Recognition criteria.
In the case where these assets are no longer fitting the description of assets, as laid out by the accounting bodies, they need to be removed from the financial statements.
Write-off encapsulates several different types of transactions that might require companies to amend their financial statements. Some of the categories that involve write-offs are as follows:
- Fixed-Asset write off: In the case where the asset is no longer of economic use to the company, it needs to be removed from the Balance Sheet. During normal course of the business, there might be a few fixed assets that have reached the end of their economic life, or they are replaced by other assets within the organization. In that case, these assets need to be written off from the financial statements.
- Current Asset write-off: This is mostly pertinent to businesses that are working on credit sales. In the case where businesses fail to recover money extended as credit to customers, they are classified as bad debts. These amounts, previously recorded as Accounts Receivables, need to be written off from the financial statements because the likelihood of recovery from these clients is negligible.
- Investment write-off: Although this case is quite rare, yet sometimes long-term investments by businesses don’t often go as planned. For example, an organization might have invested in some real-estate, that later got cancelled. In this case, any long-term interest might also require to be written off from the financial statements.
What is Waive-off?
During the business activity, a lot of companies often rely on credit sales. Additionally, there might be a couple of other receivables too by the business. In this regard, it gets highly important to ensure the fact that these receivables pay their dues back on time.
However, in certain instances, companies might not be able to recover the amount, full and final from the customers. Therefore, this calls for businesses to offer them a waiver, or waive off their dues.
This mostly occurs in the case of customers who default, and there is almost no probability of them meeting their dues back.
Waive-off from the financial statements mostly occurs as a result of companies partially recovering an amount. It is mostly at the discretion of the company to record a waive-off.
A lot of instances involve customers asking the firm for a waive-off, followed by which companies then decide on reducing their balance.
What differentiates waive-off from write off?
Waive-off and Write-off are perceived to be fairly similar aspects in accounting because they both involve reducing the asset balance of the company.
However, there are certain differences between both, waive-off and write-off that should be considered. They are as follows:
- As far as waive-off is concerned, it can be seen that waive-off is mostly undertaken when there is a definite probability of the particular recoverable not taking place. In other words, waive-off is only undertaken when companies are entirely sure of the state of the transaction. Write-off might still include a slight possibility of a different outcome (i.e. customer paying back the debt). However, waive-off includes no such chance.
- Waive-off is mostly pertaining to transactions related to sales. Write-off, on the other hand, is a broader term that might involve removing either (or both), Current Assets, as well as Non-Current Assets. Mostly companies waive-off transactions related to Accounts Receivables only.
- Waive-off can be partial. On the other hand, write-off is impartial. An organization might waive-off 50% of the balance of a certain account. However, if the company chooses to write-off a particular transaction, it would be completely removed from the financial statements.
Accounting Treatment for Write-off and Waive-off
Accounting Treatment for both, write-off and waive-off is fairly similar since it involves similar accounts.
They involve reducing the asset and then charging the reduction as a loss in the Income Statement. Therefore, it makes sense to consider them as fairly similar, when it comes to accounting treatment.
The journal entries required to record both, write-off and waive-off are as follows:
| Particular | Debit | Credit |
| Fixed Asset write-off | xxx | |
| Fixed Asset | xxx |
| Particular | Debit | Credit |
| Fixed Asset waive-off | xxx | |
| Fixed Asset | xxx |
Example of Write-off and Waive-off
Jerry Co. is a trading concern, which mostly sells pharmaceutical goods on credit to different pharmacies. On 1st January 2015, they purchased an asset worth $15,000, which had an estimated useful life of 5 years. This asset was meant to be depreciated over a course of 5 years, using the straight-line method.
However, the machine broke down in 2018, and hence, Jerry Co. decided to replace the machinery with a newer model. The current machine had no salvage value.
On the other hand, Jerry Co. had an accounts receivable balance of $25,000. Out of this, the account of Tom Inc. had an outstanding balance of $5000 since the end of 2016. During the year ended 31st December 2018, Tom Inc. decided to settle the balance, by paying 50% of the outstanding balance. The remaining was waived off from the balance, and the account was closed.
In the example mentioned above, it can be seen that there are two different cases that need different accounting treatments.
Case 1 – Writing off Fixed Assets
Since Jerry Co. no longer required the asset, they decided to write it off the financial statements. In this regard, Jerry Co. needs to write off the asset completely from the books.
As of 31st December 2018, the carrying amount of the fixed asset was $3,000 ($15,000 Historical Cost – $12,000 Accumulated Depreciation). This needs to be written off from the financial statements using the following journal entries:
| Particular | Debit | Credit |
| Fixed Asset write-off | $3,000 | |
| Fixed Asset | $3,000 |
Alternatively, this can also be approached by individually crediting the account for Fixed Asset, and debiting the account for Accumulated Depreciation. Subsequently, the write-off would be the amount equivalent to the Net Book Value of the Asset.
Case 2: Waive-off of Accounts Receivable
Since Tom Inc. paid 50% of the outstanding balance due (i.e. $5,000), the entire amount will not be declared as a bad debt. In fact, the partial amount is going to be recorded as an outstanding balance, whereas the remaining amount will be charged as received from the customer. This is illustrated in the following journal entries:
| Particular | Debit | Credit |
| Accounts Receivable Waive-off | $2,500 | |
| Bank | $2,500 | |
| Tom Inc. (Accounts Receivable) | $5,000 |
In the journal entries mentioned above, it can be seen that the partial amount is waived off, whereas the rest of the received amount is debited to the bank. Accounts Receivable Waive-off might also be similar to bad debts in the case mentioned above.
It can be seen that the final impact of this waive-off on the Income Statement in terms of profitability is going to stay consistent since it would reduce the income by the same amount.