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Explanation of Write off Example of Write offAnother example can be a business that has suffered a loss due to one of its storage units getting destroyed due to a natural calamity. The business in such a case will write off the building from its books and will account for it as a casualty loss. At times companies get insurance money from insurers in cases of insured properties to offset the corresponding casualty loss or written off amount. Even in such cases, the assets are still removed from the books because they cease to exist any further.
Write Off in AccountingIn accounting a write off is a reduction to the value of an asset and at par debiting the liabilities account. A write off occurs when a business realizes that it can no longer convert an asset into cash or is of no use to the business or lastly has zero market value. Write off is brought into practice by transferring some or the entire balance of an asset to an expense account. The accounting henceforth will differ based on the type of asset which is involved. A few scenarios which can be discussed on this ground are as follows:
In cases when the account receivable is not in a state to be collected, this is usually net off against the allowance provided for doubtful accounts or a contra account.
When a fixed asset is no longer in use this is netted off against accumulated depreciation or accumulated appreciation with the balance being transferred to a loss account.
Why Assets are Written off?Assets are written off on account for the following reasons:
When a business realizes a materialistic bad debt and thus accepts the fact that the payment from a customer cannot be collected going forward it will write off the account receivable.
When a business suffers loss made to the inventories, the business will write off that much amount of inventories and charge it to the cost of goods sold directly.
In banks when the bank has given loan to a customer and he turns defaults, the bank will first turn that asset into NPA and eventually within the stipulated time will write it off.
Advantages
It saves a lot of time for the business where it no longer has to wait for customers to make the payment knowing that it will never come.
It is a simple recording in the books of account and can be implemented just by passing two entries.
It amortizes the inherent risk by making provisions for the losses.
Businesses with rich cash will never try to put efforts into the collection of failed payments and directly go for write offs.
In the longer term, continuous write off is not perceived as an efficient activity and raises questions about the cash collection methodology of the business.
Write off even if we use or pronounce it differently, it is what we mean a loss to the business.
It overstates account receivables and violates GAAP or matching principle
It brings about balance sheet inaccuracy.
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