Understanding Write-offs

Understanding Write-offs

Have you ever heard of write-offs? Write-offs refer to the reduction of an item’s recognised value. In accounting, write-offs are crucial as the companies should reflect the reduction in the assets they own in their financial statements. This is for the investors to know the prospects and performance of the company. Thus, do not hesitate to seek help from an accounting firm in Johor Bahru if you do not know the correct way of dealing with write-offs.

 

Writing off assets

Typically, companies will record the value of the assets at the price when they purchase them. In some cases, companies may choose to record the assets at their fair values initially or subsequently. As time passes, the recorded amount for the assets may be higher than their actual values. When this happens, the company’s management will cut down or even remove the amount of assets. This process is called taking a write-off, and the steps include:

Identifying the amount of write-off

There is a high possibility that the company only needs to write-off a portion of the assets’ carrying amount (Also see How to Calculate the Carrying Value of Assets?). As an instance, the market value (Also see What Do Market Value and Book Value Mean?) of one of your fixed assets may fall until only half of its carrying amount. So, you just need to write off half of its carrying amount. Nevertheless, if one of your clients has stopped running his business, you need to write off all the unpaid accounts receivable related to him completely.

Creating journal entries

You need to create the journal entries to write off an appropriate amount for an asset, which means crediting the asset account. On the other hand, for the debit side, you have two choices, which are the reserve and expense account. If you have prepared a reserve to offset an asset, you may debit the amount to reserve. As an instance, you may debit the write-off amount to the allowance for doubtful account if you have set it up to offset your accounts receivable. If you have not prepared a reserve for that asset before, you should debit the amount to the expense account. As an instance, when writing off accounts receivable, you should debit the direct write-off to the bad debt expense account if you did not prepare a reserve for it.

Adjusting the detail records

The process of writing off an asset may have an impact on the detail records for all related accounts. As an instance, you need to ensure that you have removed the accounts receivable that you have written off from the accounts receivable ageing report so that the document does not contain that amount anymore.

 

Writing off liabilities

Also, the company may need to write off its liabilities. A situation that may cause this to happen is when its lender forgives the loan, whether partially or entirely. To record this, the company should debit its liability account and credit its gain account to cut down or remove the balance of that liability. Such a transaction will increase the company’s profit. However, liability write-offs seldom occur.

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