Write off and write down: What are the key differences?

When talking of accounting, there are a lot of terms that people don’t get right. Similarly, write off and write down are two complicated accounting terminologies.

Write off and write down are somehow similar but not the same. Write-off deducts both the current and upcoming value of an asset. In contrast, write down minimizes the value of an asset for specific tax and accounting purposes.

If you want to know how write-downs and write-offs contribute their parts to accounting, then this article is for you!

What is Write Off?

If an asset is being devalued constantly, then it’s said to be written-off. Consider if an asset’s value continuously decreases and is reduced to zero, it will become useless to a company. In such situations, companies write off such assets.

Once the asset is of no use to a company, the company write-offs it. These assets can also be written off in the QuickBooks by minimizing their value to zero dollars. 

The IRS (International Revenue Service) permits businesses, entrepreneurs, and freelancers to claim a tax deduction for their write-offs.

What is a Write Down?

As previously discussed, a write-down is similar to a write-off. But it’s not the same. Write down is considered when an asset’s value is reduced. But reducing doesn’t mean the value entirely becomes zero. In a write-down, the value depreciates and becomes lesser than the original value. 

For example, you’ve bought something, and you use it for a couple of months. After a few months, the value of your purchased item will not be the same as it was when you bought it. It will reduce a few percent. At this moment, the value that’s recorded is known as a write-down.

See also  How is Inventory Reported in the Cash Flow Statement?

Key Differences Between Write Off and Write Down:

The write-off is an accounting process in which an asset is completely devalued. Whereas write-down is an accounting process in which an asset is partially devalued.

To assist you in understanding both accounting processes, we’ve compiled the key differences between them.

  1. To write off an asset, companies reduce the value of their asset to zero. However, to write down an asset, they slightly reduce the value of their asset, i.e., the asset still has some value, but it’s lesser than the original value.
  1. A write-off is a one-time entry made once the asset has no value or lost all the value. Whereas write down can be entered again and again, varying with time and depending upon the value of an asset.
  1. When you write off an asset, you can reduce the cost of taxes by excluding the write-off value. Whereas in a write-down, you may not be able to claim a more significant tax deduction under some regulations.
  1. A write-off is more difficult for individuals to manage than companies. They occur in a company’s books. The management decides whether to write off an asset or not. But once an asset is written off, it will no longer appear in the company’s balance sheet.
  1. Whereas a written-down asset is included in the company’s balance sheet. Even though the actual value of an asset is devalued when written down, it is included as a proper line item in a balance sheet.  

Examples for Write Off and Write Down:

Explore the two examples below to understand the differences between a write-off and a write-down.

See also  What is Depreciable Value? (Explanation and Example)

How to Write Off an Inventory?

Example:

For example, in November, the company XYZ Ltd. made an inventory write-off which amounted to $40,000, due to which it has no value in the market now.

So, in this situation, XYZ Ltd. will make the journal entry for the inventory write-off by debiting $40,000 to the loss on the inventory write-off account. At the same time, it will credit the same amount to the inventory account as below:

Head of AccountDebitCredit
Loss on inventory write-off$40,000 
Inventory Account $40,000
Head of AccountDebitCredit
Write off expenses account$40,000 
Total Assets $40,000

In this journal entry, the company XYZ’s total assets on the balance sheet are reduced by $40,000. In comparison, the expenses on the income statement increased by the same amount of $40,000 in November.

How to write down an inventory?

Example:

The value of XYZ Ltd.’s inventory was $ 40,000 at the end of September 2020. Due to the pandemic, a sudden change in market situations occurred in 2020, and the company realized that the actual selling price of goods reduced and reached below their original cost.

So XYZ Ltd. decided to revalue the inventory as of October 2020, and on deep analysis, they found that the inventory’s selling value has devalued to $ 30,000 only. Below are the accounting transactions and journal entries in the books of XYZ Ltd by the following two methods:

  1. Reducing the cost of goods sold.
  2. Writing off as expenses. 

As of October 2020, inventory’s value is devalued to $ 30,000, i.e., inventory is to be written down by $ 10,000.

See also  What is a Statement of Changes in Equity? (Explained)
➔    Journal Entry: Reducing the inventory by increasing the cost of goods sold:
Head of AccountDebitCredit
Cost of Goods Sold$10,000 
Inventory Account $10,000

Inventory is written down to net realize the value of goods sold. And the difference is included in the cost of goods sold.

➔    2. Journal Entry: Reducing the inventory by debiting as expenses

Head of AccountDebitCredit
Inventory write off expenses account$10,000 
Inventory Account $10,000

Inventory is written down to net realize the value by debiting the loss to SOCI.

Head of AccountDebitCredit
Profit & Loss Account$10,000 
Inventory write-off expenses. $10,000

Inventory is written down to net realize the value by debiting the loss to SOCI.

Conclusion

Write off and write down are two different accounting transactions. Both differ in the way they are made in the company’s books. An asset is written off once its value is depreciated to zero, while an asset is written down once its value is partially declining.

These are some of the easiest accounting transactions that can be done in their books based on their data. One can easily recognize whether the asset is written off or written down by looking at its original and depreciated values.