Glossary - Write-off
A write-off refers to the reduction in the book value of an asset because it is partially or completely worthless, or the elimination of an asset or liability from the financial statements because it no longer serves a purpose or incurs a loss. This can happen when assets become impaired, obsolete, or non-collectible receivables fail to be recoverable. For liabilities, a write-off may occur when a debt is forgiven or deemed unpayable.
Also known as
- Charge-off
Use cases examples
- Financial Statements: The company recognized a write-off of $100,000 on its outdated inventory that could no longer be sold.
- Tax Return: Due to a significant portion of accounts receivable being deemed uncollectible, a write-off of $50,000 was claimed to reduce taxable income.
Considerations for investors
- Evaluating the frequency and size of write-offs to assess management's effectiveness at asset management and risk assessment.
- Considering the impact of write-offs on the company's profitability, cash flow, and overall financial stability.
Considerations for founders
- Understanding how write-offs impact the financial health and tax obligations of the business.
- Careful consideration should be given to the timing and classification of write-offs to ensure compliance with accounting principles and tax laws.
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