What Is Write Off Meaning In Financial Accounting

write off example

What Is Write Off Meaning

Essentially, a write-off reduces the value of an asset (Accounts receivable or inventory)while also debiting a related liability account. To account for unpaid loans, unpaid invoices, or losses on inventories stored in a company’s warehouse, it is most commonly used in its most literal sense.

Is Inventory Write Off  An Expense?

The loss on a write-down of Inventory is deducted from net income. As a result of the write-down, the owner now has less money in the bank. This has a knock-on effect on inventory turnover in the future.

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Is Inventory Write-off Tax Deductible?

Any business owner who sells a product has to deal with Inventory daily. Inventory isn’t deductible from your taxable income. Most individuals are under the impression that Inventory is a tax-deductible line item. I regret to inform you that this is not a factual statement. Inventory takes money away from your profits. In other words, Inventory reduces your “income before computing income taxes” or “taxable income.”

Even though this sounds like a “tax deduction,” there is a big distinction between the two. Net operating losses (“NOLs”) or losses that can be used to offset future taxable income are possible outcomes of tax deductions. A decrease in gross revenue may never be deducted from current or future years’ income.

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Can You Write Off Old Or Obsolete Inventory?

When a product’s life cycle ends, obsolete Inventory must be written down or written off the company’s books. It is possible to write down the value of the old Inventory by debiting expenditures and crediting a counter asset account, such as a reserve for obsolete Inventory.

Write Off Journal Entries Example

Trade accounts receivable totaled $20,0000 for ABC at the end of the quarter. Management decides to set aside 2% of total revenue for bad debts at the beginning of the year.

The management of ABC LTD chooses to write off the debtor account amount as bad debt at the end of the year. The ABC LTD account has a $500 negative balance.

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