Write-offs are an accounting strategy that allows for the reduction in value of an asset or as a means of removing bad debt from the financial records of the business. The use of a write-off is a task that can help a company maintain a more accurate inventory of the worth of current assets. This includes the amount of funds currently residing in the Accounts Receivable section of the financial records.
From time to time, a company may encounter a situation where a client encounters financial hardship, and is unable to pay for goods or services rendered. This creates a situation where the invoice for the services continues to remain on the books of the company as an asset. When it becomes clear that there is no chance of collecting on the outstanding invoice, it is advantageous for the company to choose to write off the amount of the invoice as a bad debt.
An account write-off is not something that a company usually does without making reasonable attempts to collect the outstanding debt. Once all reasonable efforts have taken place and the debt remains unpaid, the company may determine that continuing to carry the debt on the books will ultimately cost more in taxes, labor, and other resources than the total amount of the debt. When this is the case, the company will opt for enacting a write-off. This declaration can also result in using the amount of the bad debt as a tax write-off, which may in turn lower the amount of taxes due for the period in which the declaration took place.
In other instances, write-offs may be allowed to reduce the value of an asset to more accurately reflect the decrease in market value as the asset grows older. A write-off on production machinery or office equipment are examples of how the write-off can be utilized, since both these assets do decline in value and functionality over time. The write-off process in many manufacturing companies will require internal processes that may involve declaring equipment and related parts to be obsolete, allowing for the items to be written off as a deduction on taxes.